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Using Human-Capital Theory to Establish a Potential-Income Tax

  • Dagney Faulk
  • Jorge Martinez-Vazquez
  • Sally Wallace

There are good arguments for an individual income tax on potential income, but a drawback to such a tax is the significant administrative concern regardingits implementation. This paper argues that human-capital theory provides a widely accepted and straightforward method to estimate potential income using observed characteristics of individuals, and operationalizes this approach using data for the U.S. The paper also suggests that a potential-income tax is verysimilar to a presumptive income tax. The paper concludes by reviewing some significant problems with the implementation of a potential or presumptive income tax.

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Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 63 (2007)
Issue (Month): 3 (September)
Pages: 415-435

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200709)63:3_415:uhttea_2.0.tx_2-e
DOI: 10.1628/001522107X250131
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  1. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  2. Plug, Erik J. S. & van Praag, Bernard M. S. & Hartog, Joop, 1999. "If we knew ability, how would we tax individuals?," Journal of Public Economics, Elsevier, vol. 72(2), pages 183-211, May.
  3. Casey B. Mulligan & Xavier Sala-i-Martin, 1995. "A Labor-Income-Based Measure of the Value of Human Capital: An Application to the States of the United States," NBER Working Papers 5018, National Bureau of Economic Research, Inc.
  4. Ahmad,Etisham & Stern,Nicholas, 1991. "The Theory and Practice of Tax Reform in Developing Countries," Cambridge Books, Cambridge University Press, number 9780521265638, October.
  5. Judd, Kenneth L, 1998. "Taxes, Uncertainty, and Human Capital," American Economic Review, American Economic Association, vol. 88(2), pages 289-92, May.
  6. repec:ttp:itpwps:0307 is not listed on IDEAS
  7. Allingham, M. G., 1975. "Towards an ability tax," Journal of Public Economics, Elsevier, vol. 4(4), pages 361-376, November.
  8. Milka Casanegra de Jantscher & Vito Tanzi, 1987. "Presumptive Income Taxation: Administrative, Efficiency, and Equity Aspects," IMF Working Papers 87/54, International Monetary Fund.
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