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Measuring Effective Tax Rates on Human Capital: Methodology and an Application to Canada

  • Kirk A. Collins
  • James Davies

This paper examines the impacts of a wide range of tax provisions on the incentive to invest in human capital, and shows how these effects can be quantified using effective tax rates, or ETRs. For individuals with median earnings, ETRs on the human capital formed in first-degree university study are sizeable, although not as large as those estimated by previous authors for physical capital in Canada. When the expenditure side and its direct subsidies are also taken into account, the net effective tax rate on human capital becomes negative. The taxation of human capital is far from uniform. ETRs vary by income level, gender, part-time vs. full-time study, whether students have loans, number of dependants, and use of RESPs. The most significant differences are those related to income level. Workers at higher percentile levels of the earnings distribution throughout life may face ETRs three times as high as those for low-income workers – a result of our progressive income tax system.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 965.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_965
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  1. Larry E. Jones & Rodolfo E. Manuelli & Peter E. Rossi, 1993. "On the Optimal Taxation of Capital Income," NBER Working Papers 4525, National Bureau of Economic Research, Inc.
  2. Carneiro, Pedro & Heckman, James J., 2003. "Human Capital Policy," IZA Discussion Papers 821, Institute for the Study of Labor (IZA).
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  15. Nielsen, Soren Bo & Sorensen, Peter Birch, 1997. "On the optimality of the Nordic system of dual income taxation," Journal of Public Economics, Elsevier, vol. 63(3), pages 311-329, February.
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  17. Graham Glenday & James B. Davies, 1990. "Accrual Equivalent Marginal Tax Rates for Personal Financial Assets," Canadian Journal of Economics, Canadian Economics Association, vol. 23(1), pages 189-209, February.
  18. James B. Davies & Jie Zhang & Jinli Zeng, 2000. "Optimal tax mix in a two-sector growth model with transitional dynamics," Departmental Working Papers wp0105, National University of Singapore, Department of Economics.
  19. Michael J. Boskin, 1975. "Notes on the Tax Treatment of Human Capital," NBER Working Papers 0116, National Bureau of Economic Research, Inc.
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