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Human Capital, Multiple Income Risk and Social Insurance

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  • Schindler, Dirk

    ()
    (University of Konstanz)

Abstract

We set up an OLG-model, where households both choose human capital investment and decide on investing their endogenous savings in a portfolio of riskless and risky assets, exposing them to (aggregate) wage and capital risks due to technological shocks. We derive the optimal public policy mix of taxation and education policy. We show that risks can be efficiently diversified between private and public consumption. This results hinges on that the government can apply a wide set of instruments, including differentiated wage and capital taxation. We also show that for sufficient risk aversion the (Northern) European way of relying on progressive wage taxation and granting education subsidies is an optimal response to wage and capital risks.

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Bibliographic Info

Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2008/18.

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Length: 39 pages
Date of creation: 22 Sep 2008
Date of revision:
Handle: RePEc:hhs:nhhfms:2008_018

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Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
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Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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Keywords: Optimal Income Taxation; Multiple Income Risks; Human Capital Investment; Portfolio Choice;

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  1. Schindler, Dirk, 2006. "Optimale Besteuerung riskanter Einkünfte," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 20, number urn:isbn:9783161488405, July.
  2. Bovenberg, A Lans & Jacobs, Bas, 2001. "Redistribution and Education Subsidies are Siamese Twins," CEPR Discussion Papers 3099, C.E.P.R. Discussion Papers.
  3. Bas Jacobs, 2003. "The lost race between schooling and technology," CPB Discussion Paper 25, CPB Netherlands Bureau for Economic Policy Analysis.
  4. Louis Kaplow, 1991. "Taxation and Risk Taking: A General Equilibrium Perspective," NBER Working Papers 3709, National Bureau of Economic Research, Inc.
  5. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
  6. Sandmo, Agnar, 1972. "Discount Rates for Public Investment under Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(2), pages 287-302, June.
  7. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, December.
  8. Eaton, Jonathan & Rosen, Harvey S., 1980. "Labor supply, uncertainty, and efficient taxation," Journal of Public Economics, Elsevier, vol. 14(3), pages 365-374, December.
  9. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
  10. Costa, Carlos Eugênio da & Maestri, Lucas Jóver, 2004. "The risk-properties of human capital and the design of government policies," Economics Working Papers (Ensaios Economicos da EPGE) 554, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  11. Gordon, Roger H, 1985. "Taxation of Corporate Capital Income: Tax Revenues versus Tax Distortions," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 1-27, February.
  12. Dirk Schindler, 2008. "Taxing Risky Capital Income - A Commodity Taxation Approach," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 64(3), pages 311-333, September.
  13. Hamilton, Jonathan H, 1987. "Optimal Wage and Income Taxation with Wage Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 373-88, June.
  14. Peter Sørensen, 2005. "Neutral Taxation of Shareholder Income," International Tax and Public Finance, Springer, vol. 12(6), pages 777-801, November.
  15. Atkinson, A B, 2008. "The Changing Distribution of Earnings in OECD Countries," OUP Catalogue, Oxford University Press, number 9780199532438, September.
  16. Vidar Christiansen, 1993. "A Normative Analysis of Capital Income Taxes in the Presence of Aggregate Risk," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 18(1), pages 55-76, June.
  17. Anderberg, Dan & Andersson, Fredrik, 2003. "Investments in human capital, wage uncertainty, and public policy," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1521-1537, August.
  18. Bas Jacobs, 2002. "Optimal Income Taxation with Endogenous Human Capital," Tinbergen Institute Discussion Papers 02-045/2, Tinbergen Institute.
  19. Hartog,Joop & Maassen van den Brink,Henriëtte (ed.), 2007. "Human Capital," Cambridge Books, Cambridge University Press, number 9780521873161.
  20. A. Lans Bovenberg & Bas Jacobs, 2005. "Redistribution and Education Subsidies are Siamese Twins," Tinbergen Institute Discussion Papers 05-036/3, Tinbergen Institute.
  21. Christiansen, Vidar, 1995. "Normative Aspects of Differential, State-Contingent Capital Income Taxation," Oxford Economic Papers, Oxford University Press, vol. 47(2), pages 286-301, April.
  22. Sandmo, Agnar, 1977. "Portfolio Theory, Asset Demand and Taxation: Comparative Statics with Many Assets," Review of Economic Studies, Wiley Blackwell, vol. 44(2), pages 369-79, June.
  23. Levhari, David & Weiss, Yoram, 1974. "The Effect of Risk on the Investment in Human Capital," American Economic Review, American Economic Association, vol. 64(6), pages 950-63, December.
  24. Paul Krugman, 1995. "Growing World Trade: Causes and Consequences," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 327-377.
  25. Nielsen, Soren Bo & Sorensen, Peter Birch, 1997. "On the optimality of the Nordic system of dual income taxation," Journal of Public Economics, Elsevier, vol. 63(3), pages 311-329, February.
  26. Bas Jacobs & A. Lans Bovenberg, 2005. "Human Capital and Optimal Positive Taxation of Capital Income," Tinbergen Institute Discussion Papers 05-035/3, Tinbergen Institute.
  27. Arrow, Kenneth J & Lind, Robert C, 1970. "Uncertainty and the Evaluation of Public Investment Decisions," American Economic Review, American Economic Association, vol. 60(3), pages 364-78, June.
  28. Sandmo, Agnar, 1969. "Capital Risk, Consumption, and Portfolio Choice," Econometrica, Econometric Society, vol. 37(4), pages 586-99, October.
  29. Sandmo, Agnar, 1985. "The effects of taxation on savings and risk taking," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 5, pages 265-311 Elsevier.
  30. Pedro Carneiro & Karsten T. Hansen & James J. Heckman, 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College," NBER Working Papers 9546, National Bureau of Economic Research, Inc.
  31. Garcia-Penalosa, Cecilia & Walde, Klaus, 2000. "Efficiency and Equity Effects of Subsidies to Higher Education," Oxford Economic Papers, Oxford University Press, vol. 52(4), pages 702-22, October.
  32. Kaplow, Louis, 1994. "Taxation and Risk Taking: A General Equilibrium Perspective," National Tax Journal, National Tax Association, vol. 47(4), pages 789-98, December.
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