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The Dynamics of Optimal Taxation when Human Capital is Endogenous


  • Marek Kapicka

    () (Economics University of California Santa Barbara)


This paper characterizes the dynamics of Pareto efficient income taxes in a dynamic economy with human capital accumulation. I extend the tools and insights developed by Mirrlees (1971) into a dynamic framework. I follow Diamond (1998) by assuming that there are no income effects on labor supply. If the government can freely borrow and save, I show that i) the problem of finding efficient allocation can be decomposed into two relatively simple stages and ii) if agents have access to capital market (with zero tax on capital), the efficient allocations may be in some cases implemented in a competitive equilibrium by using history independent income taxes. I compute the sequence of optimal income taxes that implement the optimum and show that they marginal income taxes tend to decrease over time and that the gains from adjustment of human capital are about 12 times larger than the static gains from labor supply adjustment

Suggested Citation

  • Marek Kapicka, 2006. "The Dynamics of Optimal Taxation when Human Capital is Endogenous," 2006 Meeting Papers 349, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:349

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    References listed on IDEAS

    1. Battaglini, Marco & Coate, Stephen, 2008. "Pareto efficient income taxation with stochastic abilities," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 844-868, April.
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    20. Julian Neira & Marek Kapicka, 2012. "Optimal Taxation in a Life-Cycle Economy with Endogenous Human Capital Formation," 2012 Meeting Papers 1164, Society for Economic Dynamics.
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    Cited by:

    1. Alexander Gelber & Matthew Weinzierl, 2012. "Equalizing Outcomes vs. Equalizing Opportunities: Optimal Taxation when Children's Abilities Depend on Parents' Resources," Harvard Business School Working Papers 13-014, Harvard Business School, revised Mar 2014.
    2. Alexander M. Gelber & Matthew C. Weinzierl, 2012. "Equalizing Outcomes and Equalizing Opportunities: Optimal Taxation when Children's Abilities Depend on Parents' Resources," NBER Working Papers 18332, National Bureau of Economic Research, Inc.
    3. Alexander Ludwig & Dirk Krueger, 2015. "Optimal Capital and Progressive Labor Income Taxation with Endogenous Schooling Decisions and Intergenerational Transfers," 2015 Meeting Papers 334, Society for Economic Dynamics.
    4. Krueger, Dirk & Ludwig, Alexander, 2013. "On the Optimal Provision of Social Insurance," MEA discussion paper series 201302, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    5. Krueger, Dirk & Ludwig, Alexander, 2016. "On the optimal provision of social insurance: Progressive taxation versus education subsidies in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 77(C), pages 72-98.
    6. Alexander Ludwig & Dirk Krueger, 2010. "Optimal Progressive Taxation and Education Subsidies in a Model of Endogenous Human Capital Formation," 2010 Meeting Papers 388, Society for Economic Dynamics.
    7. OBARA, Takuya, 2017. "Optimal human capital policies under the endogenous choice of educational types," CCES Discussion Paper Series 66, Center for Research on Contemporary Economic Systems, Graduate School of Economics, Hitotsubashi University.
    8. N. Gregory Mankiw & Matthew Weinzierl & Danny Yagan, 2009. "Optimal Taxation in Theory and Practice," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 147-174, Fall.

    More about this item


    Optimal taxation; private information; human capital;

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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