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Marginal Welfare Costs of Taxation with Human and Physical Capital

Author

Listed:
  • Sam Allgood
  • Arthur Snow

Abstract

We develop a perfect foresight, overlapping generations model with intragenerational inequality and endogenous human and physical capital investment, and we calculate welfare costs for marginal reforms of taxation and public spending. Welfare costs are uniformly lower than in the equivalent static model where human and physical capital are fixed. Most of the upward bias in static estimates arises from fixed human capital because welfare cost is predominantly tax leakage from lower effective labor supply, but reallocating time between education and labor can leave effective labor supply unchanged. Hence, adjustments in human capital have an important mitigating influence on marginal welfare costs. (JEL D91, H20, H31, H41, J22, J24) Copyright 2006, Oxford University Press.

Suggested Citation

  • Sam Allgood & Arthur Snow, 2006. "Marginal Welfare Costs of Taxation with Human and Physical Capital," Economic Inquiry, Western Economic Association International, vol. 44(3), pages 451-464, July.
  • Handle: RePEc:oup:ecinqu:v:44:y:2006:i:3:p:451-464
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    File URL: http://hdl.handle.net/10.1093/ei/cbj024
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    Citations

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    Cited by:

    1. Pedro Barros & Xavier Martinez-Giralt, 2008. "On international cost-sharing of pharmaceutical R&D," International Journal of Health Economics and Management, Springer, vol. 8(4), pages 301-312, December.
    2. Alison Felix, 2007. "The incidence of capital taxation and the magnitude of its burden," Regional Research Working Paper RRWP 07-02, Federal Reserve Bank of Kansas City.
    3. Pedro Pita Barros & Xavier Martínez-Giralt, 2006. "On insurance and the cost-sharing of pharmaceutical R&D," Working Papers 293, Barcelona Graduate School of Economics.

    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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