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Dynamic optimal taxation with human capital

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  • Leslie Reinhorn

Abstract

This paper revisits the dynamic optimal taxation results of Jones, Manuelli, and Rossi (1993, 1997). They use a growth model with human capital and find that optimal taxes on both capital income and labor income converge to zero in steady state. For one of the models under consideration, I show that the representative household's problem does not have an interior solution. This raises concerns since these corners are inconsistent with aggregate data. Interiority is restored if preferences are modified so that human capital augments the value of leisure time. With this change, the optimal tax problem is analyzed and, reassuringly, the Jones, Manuelli, and Rossi results are confirmed: neither capital income nor labor income should be taxed in steady state.

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Bibliographic Info

Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2003 with number 77.

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Date of creation: 27 Sep 2004
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Handle: RePEc:mmf:mmfc03:77

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  1. Ladron-de-Guevara, Antonio & Ortigueira, Salvador & Santos, Manuel S, 1999. "A Two-Sector Model of Endogenous Growth with Leisure," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 609-31, July.
  2. Ortigueira, Salvador & Santos, Manuel S., 2002. "Equilibrium Dynamics in a Two-Sector Model with Taxes," Journal of Economic Theory, Elsevier, vol. 105(1), pages 99-119, July.
  3. Larry E. Jones & Rodolfo E. Manuelli & Peter E. Rossi, 1993. "On the Optimal Taxation of Capital Income," NBER Working Papers 4525, National Bureau of Economic Research, Inc.
  4. Kenneth L. Judd, 2002. "Capital-Income Taxation with Imperfect Competition," American Economic Review, American Economic Association, vol. 92(2), pages 417-421, May.
  5. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
  6. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
  7. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
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Cited by:
  1. Marcelo Arbex & Enlinson Mattos, 2013. "Optimal Sales Tax Rebates and Tax Enforcement Consumers," Working Papers 1302, University of Windsor, Department of Economics.
  2. Basu, Parantap & Marsiliani, Laura & Renström, Thomas I, 2004. "Optimal Dynamic Taxation with Indivisible Labour," CEPR Discussion Papers 4190, C.E.P.R. Discussion Papers.
  3. Igor Kotlán & Zuzana Machová & Lenka Janíčková, 2011. "Taxation Influence on the Economic Growth," Politická ekonomie, University of Economics, Prague, vol. 2011(5), pages 638-658.

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