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Optimal Taxation and Human Capital Policies over the Life Cycle

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  • Stefanie Stantcheva

Abstract

This paper derives optimal income tax and human capital policies in a dynamic life cycle model of labor supply and risky human capital formation. The wage is a function of both stochastic, persistent, and exogenous "ability'' and endogenous human capital. Human capital is acquired throughout life through monetary expenses. The government faces asymmetric information regarding the initial ability of agents and the lifetime evolution of ability, as well as the labor supply. The optimal subsidy on human capital expenses is determined by three considerations: counterbalancing distortions to human capital investment from the taxation of wage and capital income, encouraging labor supply, and providing insurance against adverse draws from the productivity distribution. When the wage elasticity with respect to ability is increasing in human capital, the optimal subsidy involves less than full deductibility of human capital expenses on the tax base, and falls with age. I consider two ways to implement the optimum: income contingent loans, and a tax scheme that allows for a deferred deductibility of human capital expenses. Numerical results are presented that suggest that full dynamic risk-adjusted deductibility of expenses might be close to optimal, and that simple linear age-dependent policies can achieve most of the welfare gain from the second best.

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  • Stefanie Stantcheva, 2015. "Optimal Taxation and Human Capital Policies over the Life Cycle," NBER Working Papers 21207, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21207
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    Cited by:

    1. Lergetporer, Philipp & Woessmann, Ludger, 2019. "The Political Economy of Higher Education Finance: How Information and Design Affect Public Preferences for Tuition," Rationality and Competition Discussion Paper Series 145, CRC TRR 190 Rationality and Competition.
    2. Philipp Lergetporer & Ludger Woessmann, 2019. "The political economy of higher education finance: how information and design affect public preferences for tuition," CESifo Working Paper Series 7536, CESifo Group Munich.
    3. Koehne, Sebastian & Sachs, Dominik, 2019. "Pareto-Efficient Tax Deductions," CEPR Discussion Papers 13852, C.E.P.R. Discussion Papers.
    4. Musab Kurnaz & Mehmet Soytas, 2019. "Early Childhood Investment and Income Taxation," 2019 Meeting Papers 290, Society for Economic Dynamics.
    5. Koeniger, Winfried & Zanella, Carlo, 2020. "Opportunity and Inequality across Generations," Economics Working Paper Series 2003, University of St. Gallen, School of Economics and Political Science.
    6. Spencer Bastani & Daniel Waldenström, 2018. "How Should Capital be Taxed? Theory and Evidence from Sweden," CESifo Working Paper Series 7004, CESifo Group Munich.
    7. Long, Ngo Van, 2019. "Financing higher education in an imperfect world," Economics of Education Review, Elsevier, vol. 71(C), pages 23-31.
    8. Richard Blundell & Monica Costa Dias & Costas Meghir & Jonathan Shaw, 2016. "Female Labor Supply, Human Capital, and Welfare Reform," Econometrica, Econometric Society, vol. 84, pages 1705-1753, September.
    9. Marcelo Arbex & Enlinson Mattos, 2017. "Optimal Paternalistic Health and Human Capital Policies," Working Papers 1709, University of Windsor, Department of Economics.
    10. William Peterman, 2016. "The effect of endogenous human capital accumulation on optimal taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 46-71, July.
    11. Blandin, Adam & Peterman, William B., 2019. "Taxing capital? The importance of how human capital is accumulated," European Economic Review, Elsevier, vol. 119(C), pages 482-508.
    12. Bastani, Spencer & Waldenström, Daniel, 2018. "How Should Capital Be Taxed? Theory and Evidence from Sweden," IZA Discussion Papers 11475, Institute of Labor Economics (IZA).
    13. Juergen Jung & Chung Tran, 2017. "Health Risk, Insurance and Optimal Progressive Income Taxation," Working Papers 2017-01, Towson University, Department of Economics, revised Feb 2019.
    14. Findeisen, Sebastian & Sachs, Dominik, 2016. "Education and optimal dynamic taxation: The role of income-contingent student loans," Journal of Public Economics, Elsevier, vol. 138(C), pages 1-21.
    15. Marek Kapička, 2015. "Optimal Mirrleesean Taxation in a Ben-Porath Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(2), pages 219-248, April.
    16. Charles Beach & Frank Milne, 2018. "Challenges To Higher Education In Canada And Australia," Working Paper 1407, Economics Department, Queen's University.
    17. OBARA, Takuya, 2018. "Optimal human capital policies under the endogenous choice of educational types," CCES Discussion Paper Series 66_v2, Center for Research on Contemporary Economic Systems, Graduate School of Economics, Hitotsubashi University.
    18. Moser, Christian & Olea de Souza e Silva, Pedro, 2019. "Optimal Paternalistic Savings Policies," MPRA Paper 95383, University Library of Munich, Germany.
    19. Juergen Jung & Chung Tran, 2018. "Optimal Progressive Income Taxation in a Bewley-Grossman Framework," ANU Working Papers in Economics and Econometrics 2018-662, Australian National University, College of Business and Economics, School of Economics.
    20. Sebastian Koehne & Dominik Sachs, 2019. "Pareto-efficient Tax Deductions," CESifo Working Paper Series 7744, CESifo Group Munich.
    21. Abdoulaye Ndiaye, 2017. "Flexible Retirement and Optimal Taxation," Working Paper Series WP-2018-18, Federal Reserve Bank of Chicago, revised 05 Nov 2018.
    22. Robin Boadway & Jean‐Denis Garon & Louis Perrault, 2019. "Optimal mixed taxation, credit constraints, and the timing of income tax reporting," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 21(4), pages 708-737, August.
    23. Kurnaz, Musab & Soytas, Mehmet A., 2019. "Intergenerational Income Mobility and Income Taxation," GLO Discussion Paper Series 409, Global Labor Organization (GLO).
    24. Didier Laussel & Ngo Van Long & Joana Resende, 2019. "Quality and Price Personalization under Customer Recognition: A Dynamic Monopoly Model," CIRANO Working Papers 2019s-03, CIRANO.
    25. Abdoulaye Ndiaye, 2018. "Flexible Retirement and Optimal Taxation," 2018 Meeting Papers 535, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • I21 - Health, Education, and Welfare - - Education - - - Analysis of Education
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality

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