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Human Capital and Optimal Positive Taxation of Capital Income

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  • Bas Jacobs

    ()
    (Faculty of Economics and Econometrics, Universiteit van Amsterdam)

  • A. Lans Bovenberg

    ()
    (Erasmus Universiteit Rotterdam, and University of Tilburg)

Abstract

This paper analyzes optimal linear taxes on capital and labor incomes in a life-cyclemodel of human capital investment, financial savings, and labor supply with heteroge-nous individuals. A dual income tax with a positive marginal tax rate on not onlylabor income but also capital income is optimal. The positive tax on capital incomeserves to alleviate the distortions of the labor tax on human capital accumulation.The optimal marginal tax rate on capital income is lower than that on labor incomeif savings are elastic compared to investment in human capital; substitution betweeninputs in human capital formation is difficult; and most investments in human capitalare verifiable. Numerical calculations suggest that the optimal marginal tax rate oncapital income is close to the tax rate on labor income. This paper resulted in a publication in 'International Tax and Public Finance' .

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 05-035/3.

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Date of creation: 06 Apr 2005
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Handle: RePEc:dgr:uvatin:20050035

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Keywords: human capital; labor income taxation; capital income taxation; life cycle; education subsidies.;

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