Optimal Factor Tax Incidence in Two-sector Human Capital-based Models
AbstractThis paper studies the optimal factor tax incidence in a standard two-sector, human capital-based endogenous growth model elucidated by Lucas (1988). Capital income taxes generate dynamic inefficiency for capital accumulation and labor income taxes create dynamic inefficiency for human capital accumulation. A factor tax incidence is a tradeoff between these two inefficiencies. A switch from capital income taxes to labor income taxes reduces the long-run welfare coming from lower leisure and increases the long-run welfare originated from higher economic growth and higher consumption. Because the representative agent’s learning time and human capital are inseparable and thus affect learning activities at the same degree, we find that based on the current US income tax code, it is optimal to first tax capital income, and to resort to taxing labor income only when tax revenue is insufficient to cover government expenditure.
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Bibliographic InfoPaper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 12-A018.
Length: 49 pages
Date of creation: Dec 2012
Date of revision:
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Web page: http://www.econ.sinica.edu.tw/index.php?foreLang=en
More information through EDIRC
two-sector model; human capital; optimal factor tax incidence;
Other versions of this item:
- Chen, Been-Lon & Lu, Chia-Hui, 2013. "Optimal factor tax incidence in two-sector human capital-based models," Journal of Public Economics, Elsevier, vol. 97(C), pages 75-94.
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-07 (All new papers)
- NEP-DGE-2013-01-07 (Dynamic General Equilibrium)
- NEP-FDG-2013-01-07 (Financial Development & Growth)
- NEP-HRM-2013-01-07 (Human Capital & Human Resource Management)
- NEP-MAC-2013-01-07 (Macroeconomics)
- NEP-PBE-2013-01-07 (Public Economics)
- NEP-PUB-2013-01-07 (Public Finance)
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