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Optimal Wage Taxation When Human Capital and Employment Are Endogenous

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Kreider, Brent

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Abstract

This paper studies how optimal wage tax conclusions from the classic two-period life-cycle model of human capital accumulation are affected by endogenizing the number of taxpaying workers. In the absence of a corrective policy, young individuals underinvest in human capital from a social perspective because tax premiums for transfers to nonworkers are not actuarially adjusted downward for human capital attainment. Compensated wage taxes and subsidies can restore proper price signals. Numerical simulations suggest that even modest extensive margin employment elasticities can be sufficient to substantially impact the magnitudes and even the signs of optimal wage tax rates.

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Publisher Info
Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 12358.

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Date of creation: 11 May 2005
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Publication status: Published in Economic Inquiry, October 2008, Vol. 46, No. 4, pp. 660-675.
Handle: RePEc:isu:genres:12358

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Find related papers by JEL classification:
H2 - Public Economics - - Taxation, Subsidies, and Revenue
H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
J2 - Labor and Demographic Economics - - Demand and Supply of Labor

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    Other versions:
  6. Phelps, Edmund S, 1994. "Low-Wage Employment Subsidies versus the Welfare State," American Economic Review, American Economic Association, vol. 84(2), pages 54-58, May. [Downloadable!] (restricted)
  7. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty and optimal taxation: In defense of commodity taxes," Journal of Public Economics, Elsevier, vol. 56(2), pages 291-310, February. [Downloadable!] (restricted)
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  11. Card, David & Krueger, Alan B, 1992. "Does School Quality Matter? Returns to Education and the Characteristics of Public Schools in the United States," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 1-40, February. [Downloadable!] (restricted)
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  12. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, vol. 70(4), pages 705-15, September. [Downloadable!] (restricted)
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  13. 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. [Downloadable!] (restricted)
  14. 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. [Downloadable!] (restricted)
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