Advanced Search
MyIDEAS: Login to save this paper or follow this series

Income Taxation in a Life Cycle Model with Human Capital

Contents:

Author Info

  • Michael P. Keane

    ()
    (Nuffield College, University of Oxford)

Abstract

I examine the effect of labor income taxation in life-cycle models where work experience builds human capital. In this case, the wage no longer equals the opportunity cost of time – which is, instead, the wage plus returns to work experience. This has a number of interesting consequences. First, the data appear consistent with much larger labor supply elasticities than most prior work suggests. Second, again contrary to conventional wisdom, permanent tax changes can have larger effects on current labor supply than temporary tax changes. Third, human capital amplifies the labor supply response to permanent tax changes in the long-run, as a permanent tax reduces the rate of human capital accumulation (reducing worker productivity). Fourth, for plausible parameter values, welfare losses from proportional income taxation are likely to be much larger than conventional wisdom suggests.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nuffield.ox.ac.uk/economics/papers/2012/Taxes_HC_42_Nuffield.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2012-W08.

as in new window
Length: 41 pages
Date of creation: 15 Oct 2012
Date of revision:
Handle: RePEc:nuf:econwp:1208

Contact details of provider:
Web page: http://www.nuff.ox.ac.uk/economics/

Related research

Keywords:

Other versions of this item:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
  2. Charles L. Ballard & Don Fullerton, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 6(3), pages 117-131, Summer.
  3. van der Klaauw, Wilbert & Wolpin, Kenneth I., 2008. "Social security and the retirement and savings behavior of low-income households," Journal of Econometrics, Elsevier, Elsevier, vol. 145(1-2), pages 21-42, July.
  4. Sheshinski, Eytan, 1972. "The Optimal Linear Income-Tax," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 39(3), pages 297-302, July.
  5. Richard Rogerson & Johanna Wallenius, 2007. "Micro and Macro Elasticities in a Life Cycle Model With Taxes," NBER Working Papers 13017, National Bureau of Economic Research, Inc.
  6. Kimmel, Jean & Kniesner, Thomas J., 1998. "New evidence on labor supply:: Employment versus hours elasticities by sex and marital status," Journal of Monetary Economics, Elsevier, Elsevier, vol. 42(2), pages 289-301, July.
  7. Eric French, 2004. "The Effects of Health, Wealth and Wages on Labor Supply and Retirement Behavior," 2004 Meeting Papers, Society for Economic Dynamics 96, Society for Economic Dynamics.
  8. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier.
  9. Patrick Bajari & Ali Hortacsu, 2003. "Are Structural Estimates of Auction Models Reasonable? Evidence from Experimental Data," Working Papers, Stanford University, Department of Economics 03002, Stanford University, Department of Economics.
  10. Michael P. Keane & Kenneth I. Wolpin, 1995. "The career decisions of young men," Working Papers, Federal Reserve Bank of Minneapolis 559, Federal Reserve Bank of Minneapolis.
  11. Emmanuel Saez & Joel B. Slemrod & Seth H. Giertz, 2009. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," NBER Working Papers 15012, National Bureau of Economic Research, Inc.
  12. repec:bla:restud:v:72:y:2005:i:2:p:395-427 is not listed on IDEAS
  13. Edward C. Prescott, 2006. "Nobel Lecture: The Transformation of Macroeconomic Policy and Research," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 114(2), pages 203-235, April.
  14. Ellen R. McGrattan & Richard Rogerson, 1998. "Changes in hours worked since 1950," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 2-19.
  15. Michael P. Keane & Kenneth I. Wolpin, 2010. "The Role Of Labor And Marriage Markets, Preference Heterogeneity, And The Welfare System In The Life Cycle Decisions Of Black, Hispanic, And White Women," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(3), pages 851-892, 08.
  16. Susumu Imai & Michael P. Keane, 2004. "Intertemporal Labor Supply and Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 601-641, 05.
  17. Geweke, John & Keane, Michael, 2000. "An empirical analysis of earnings dynamics among men in the PSID: 1968-1989," Journal of Econometrics, Elsevier, Elsevier, vol. 96(2), pages 293-356, June.
  18. David Domeij & Martin Floden, 2006. "The Labor-Supply Elasticity and Borrowing Constraints: Why Estimates are Biased," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 242-262, April.
  19. James J. Heckman, 1976. "Estimates of a Human Capital Production Function Embedded in a Life-Cycle Model of Labor Supply," NBER Chapters, National Bureau of Economic Research, Inc, in: Household Production and Consumption, pages 225-264 National Bureau of Economic Research, Inc.
  20. Michael Keane, 2010. "Labor Supply and Taxes: A Survey," Working Paper Series, Finance Discipline Group, UTS Business School, University of Technology, Sydney 160, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  21. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(6), pages 1059-85, December.
  22. Heckman, James J & MaCurdy, Thomas, 1982. "Corrigendum on a Life Cycle Model of Female Labour Supply," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(4), pages 659-60, October.
  23. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2003. "Risk averse behavior in generalized matching pennies games," Games and Economic Behavior, Elsevier, Elsevier, vol. 45(1), pages 97-113, October.
  24. Saez, Emmanuel, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 68(1), pages 205-29, January.
  25. Shaw, Kathryn L, 1989. "Life-Cycle Labor Supply with Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(2), pages 431-56, May.
  26. Low, Hamish & Maldoom, Daniel, 2004. "Optimal taxation, prudence and risk-sharing," Journal of Public Economics, Elsevier, Elsevier, vol. 88(3-4), pages 443-464, March.
  27. Keane, Michael P & Wolpin, Kenneth I, 2001. "The Effect of Parental Transfers and Borrowing Constraints on Educational Attainment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1051-1103, November.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Michael Keane, 2010. "Labor Supply and Taxes: A Survey," Working Paper Series, Finance Discipline Group, UTS Business School, University of Technology, Sydney 160, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  2. Rupert, Peter & Zanella, Giulio, 2012. "Revisiting wage, earnings, and hours profiles," University of California at Santa Barbara, Economics Working Paper Series qt61f2f1hv, Department of Economics, UC Santa Barbara.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nuf:econwp:1208. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maxine Collett).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.