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The Utility Compensated Effects of a Wage Tax on Human Capital and Consumption Decisions

  • Syed M. Ahsan

    (Department of Economics, Thompson Rivers University, Kamloops, BC, Canada)

  • Panagiotis Tsigaris

    (Department of Economics, Thompson Rivers University, Kamloops, BC, Canada, ptsigaris@tru.ca)

In this article, the authors show that a wage tax, which neither alters the relative price of current versus future consumption nor distorts the relative expected return (vis-Ã -vis the cost) to investing in human capital, leads to biases at both these margins. The authors find that the common assumptions of decreasing absolute risk aversion and nondecreasing relative risk aversion are sufficient for a wage tax increase to yield a stimulating effect on human capital as well as current consumption. Finally, the authors reinterpret the above findings in the context of the well-known analysis of taxation of financial assets in a two-period portfolio choice model.

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File URL: http://pfr.sagepub.com/content/39/4/571.abstract
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Article provided by in its journal Public Finance Review.

Volume (Year): 39 (2011)
Issue (Month): 4 (July)
Pages: 571-593

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Handle: RePEc:sae:pubfin:v:39:y:2011:i:4:p:571-593
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