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Optimal Factor Tax Incidence in Two-sector Human Capital-based Models

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This paper studies the optimal factor tax incidence in a standard two-sector, human capital-based endogenous growth model elucidated by Lucas (1988). Capital income taxes generate dynamic inefficiency for capital accumulation and labor income taxes create dynamic inefficiency for human capital accumulation. A factor tax incidence is a tradeoff between these two inefficiencies. A switch from capital income taxes to labor income taxes reduces the long-run welfare coming from lower leisure and increases the long-run welfare originated from higher economic growth and higher consumption. Because the representative agent’s learning time and human capital are inseparable and thus affect learning activities at the same degree, we find that based on the current US income tax code, it is optimal to first tax capital income, and to resort to taxing labor income only when tax revenue is insufficient to cover government expenditure.

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  • Been-Lon Chen & Chia-Hui Lu, 2012. "Optimal Factor Tax Incidence in Two-sector Human Capital-based Models," IEAS Working Paper : academic research 12-A018, Institute of Economics, Academia Sinica, Taipei, Taiwan.
  • Handle: RePEc:sin:wpaper:12-a018
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    Cited by:

    1. Long, Xin & Pelloni, Alessandra, 2017. "Factor income taxation in a horizontal innovation model," Journal of Public Economics, Elsevier, vol. 154(C), pages 137-159.
    2. Chen, Ping-ho & Chu, Angus C. & Chu, Hsun & Lai, Ching-chong, 2017. "Short-run and long-run effects of capital taxation on innovation and economic growth," Journal of Macroeconomics, Elsevier, vol. 53(C), pages 207-221.
    3. Halkos, George & Paizanos, Epameinondas, 2015. "Fiscal policy and economic performance: A review of the theoretical and empirical literature," MPRA Paper 67737, University Library of Munich, Germany.
    4. Shu-Hua Chen, 2015. "Fiscal and Monetary Policies in a Transactions-Based Endogenous Growth Model with Imperfect Competition," The Japanese Economic Review, Japanese Economic Association, vol. 66(1), pages 89-111, March.
    5. Chia-Hui Lu & Been-Lon Chen, 2015. "Optimal Capital Taxation in a Neoclassical Growth Model," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(2), pages 257-269, April.
    6. repec:ebl:ecbull:eb-17-00472 is not listed on IDEAS
    7. NAITO Takumi, 2017. "A Larger Country Sets a Lower Optimal Tariff," Discussion papers 17037, Research Institute of Economy, Trade and Industry (RIETI).
    8. Tenryu, Yohei, 2017. "Capital Income Tax, Linear R&D Technology, and Economic Growth," MPRA Paper 78706, University Library of Munich, Germany.
    9. Masaya Yasuoka & Minoru Hayashida, 2015. "How should a government finance redistribution policies?," Discussion Paper Series 136, School of Economics, Kwansei Gakuin University, revised Oct 2015.

    More about this item

    Keywords

    two-sector model; human capital; optimal factor tax incidence;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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