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Optimal Wage Taxation When Human Capital and Employment Are Endogenous

  • Kreider, Brent

This paper studies how optimal wage tax conclusions from the classic two-period life-cycle model of human capital accumulation are affected by endogenizing the number of taxpaying workers. In the absence of a corrective policy, young individuals underinvest in human capital from a social perspective because tax premiums for transfers to nonworkers are not actuarially adjusted downward for human capital attainment. Compensated wage taxes and subsidies can restore proper price signals. Numerical simulations suggest that even modest extensive margin employment elasticities can be sufficient to substantially impact the magnitudes and even the signs of optimal wage tax rates.

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 12358.

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Date of creation: 01 Oct 2008
Date of revision:
Publication status: Published in Economic Inquiry, October 2008, vol. 46 no. 4, pp. 660-675
Handle: RePEc:isu:genres:12358
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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