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Tax progression and human capital in imperfect labour markets

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  • Fuest, Clemens
  • Huber, Bernd
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    Abstract

    Recent contributions to the theory of taxation argue that tax progression raises welfare and employment in the presence of labour market imperfections. This literature takes the endowment of workers with human capital as given. The present paper analyses the effects of tax progression in a model with endogenous human capital formation. We show that the effect of tax progression on human capital investment depends on the deductibility of the cost of human capital formation. With full deductibility, tax progression raises employment and welfare. With incomplete deductibility, in contrast, the effect of tax progression on employment and welfare may be negative.

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    Bibliographic Info

    Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 20291.

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    Date of creation: 2001
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    Publication status: Published in German Economic Review 1 2(2001): pp. 1-18
    Handle: RePEc:lmu:muenar:20291

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    Cited by:
    1. Dirk Schindler, 2011. "Tuition Fees and the Dual Income Tax: The Optimality of the Nordic Income Tax System Reconsidered," German Economic Review, Verein für Socialpolitik, vol. 12(1), pages 59-84, 02.
    2. Wöhlbier, Florian, 2002. "Subsidising Education with Unionised Labour Markets," Discussion Papers in Economics 7, University of Munich, Department of Economics.
    3. van Ewijk, Casper & Tang, Paul J.G., 2007. "Unions, progressive taxes, and education subsidies," European Journal of Political Economy, Elsevier, vol. 23(4), pages 1119-1139, December.
    4. Hungerbuhler, Mathias, 2007. "Tax progression and training in a matching framework," Labour Economics, Elsevier, vol. 14(2), pages 185-200, April.
    5. Stefan Boeters, 2009. "Optimal tax progressivity in unionised labour markets; what are the driving forces?," CPB Discussion Paper 129, CPB Netherlands Bureau for Economic Policy Analysis.

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