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Taxing Human Capital Efficiently – The Double Dividend of Taxing Nonqualified Labour More Heavily Than Qualified Labour

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Author Info
Wolfram F. Richter ()

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Abstract

Assuming isoelastic returns to education and an endogenous supply of qualified and nonqualified labour, it is shown to be second-best efficient not to distort the choice of education. Furthermore, taxation should set incentives so that qualified labour is substituted for nonqualified labour. As a result, it is efficient to tax labour income regressively with respect to qualification and to tax the monetary cost of education at a level that restores efficiency in education. Atax on capital income alleviates the distortion that progressive taxation of labour income exerts on human-capital investment.

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Publisher Info
Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0012.

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Length: 32 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:rwi:repape:0012

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Related research
Keywords: Endogenous choice of education and labour; efficient taxation of human and nonhuman capital; double-dividend hypothesis;

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
I28 - Health, Education, and Welfare - - Education - - - Government Policy
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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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.:
  1. Berthold U. Wigger, 2004. "Are Higher Education Subsidies Second Best?," Scandinavian Journal of Economics, Blackwell Publishing, vol. 106(1), pages 65-82, 03. [Downloadable!] (restricted)
  2. Lans Bovenberg, A. & Jacobs, Bas, 2005. "Redistribution and education subsidies are Siamese twins," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2005-2035, December. [Downloadable!] (restricted)
    Other versions:
  3. Huizinga, Harry & Nielsen, Soren Bo, 1997. "Capital income and profit taxation with foreign ownership of firms," Journal of International Economics, Elsevier, vol. 42(1-2), pages 149-165, February. [Downloadable!] (restricted)
    Other versions:
  4. 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.
  5. Heckman, James J, 1976. "A Life-Cycle Model of Earnings, Learning, and Consumption," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S11-44, August. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. Bovenberg, A Lans & Jacobs, Bas, 2005. "Human Capital and Optimal Positive Taxation of Capital Income," CEPR Discussion Papers 5047, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Blackwell Publishing, vol. 38(114), pages 175-208, April. [Downloadable!] (restricted)
  9. Nerlove, Marc & Razin, Assaf & Sadka, Efraim & Weizsaecker, Robert K. von, 1992. "Comprehensive Income Taxation, Investments in Human and Physical Capital, and Productivity," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich.
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  10. Lawrence Goulder, 1995. "Environmental taxation and the double dividend: A reader's guide," International Tax and Public Finance, Springer, vol. 2(2), pages 157-183, August. [Downloadable!] (restricted)
  11. Andersson, Fredrik & Konrad, Kai A., 2003. "Human capital investment and globalization in extortionary states," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1539-1555, August. [Downloadable!] (restricted)
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  12. Trostel, Philip A, 1993. "The Effect of Taxation on Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 327-50, April. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Bas Jacobs & Lans Bovenberg, 2008. "Optimal Taxation of Human Capital and the Earnings Function," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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