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Optimal Taxation with Risky Human Capital and Retirement Savings

Author

Listed:
  • Radoslaw Paluszynski

    (University of Houston)

  • Pei Cheng Yu

    (UNSW Business School)

Abstract

We study optimal tax policies with human capital investment and retirement savings for present-biased agents. Agents are heterogeneous in their innate ability and make risky education investments which determines their labor productivity and affects their consumption path. We characterize the optimal wedges and show that they are different across education groups. More specifically, we demonstrate how the optimal policy encourages human capital investment with savings incentives. We show that the optimum can be implemented with income-contingent student loans, and existing retirement policies augmented by a new tax instrument that subsidizes retirement savings for college graduates. The proposed instrument takes the form of employer’s 401(k) matching contribution proportional to the repayment of student loans, and mimics the latest policy proposals that aim to incentivize college education. We show that the optimal tax system yields significant welfare gains relative to the optimal policies designed for time-consistent agents.

Suggested Citation

  • Radoslaw Paluszynski & Pei Cheng Yu, "undated". "Optimal Taxation with Risky Human Capital and Retirement Savings," Discussion Papers 2019-05, School of Economics, The University of New South Wales.
    • Handle: RePEc:swe:wpaper:2019-05
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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2019-05.pdf
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    References listed on IDEAS

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    Keywords

    Present bias; Human capital; Retirement; Sequential screening;
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