Taxation and Human Capital Accumulation
How do taxes affect human capital accumulation? This question has been studied extensively in the context of two model classes: overlapping generations (OLG) and infinite horizon (IH) models. These embody very different assumptions about the intergenerational transmission of physical and human capital. This paper investigates how such differences in intercohort persistence affect the responsiveness of human capital to taxation. A model is developed that nests OLG and IH models as special cases. The steady state and transitional effects of tax changes are computed for varying degrees of persistence. The main finding is that stronger intercohort persistence magnifies the impact of taxation on human capital and leads to slower transitional dynamics. As a result, IH models generate systematically larger tax effects than OLG models. For the tax experiments studied here, models with complete persistence generate steady state tax elasticities at least two times larger and transitional half-lives at least three times longer than do models without persistence.
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|Date of creation:||01 Jan 2004|
|Publication status:||Published in Macroeconomic Dynamics 2004, vol. 8 no. 3, pp. 310-334|
|Contact details of provider:|| Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070|
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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