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Measuring Effective Tax Rates on Human Capital: The Canadian Case

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This paper analyzes the impacts of a wide range of tax provisions on the incentive to invest in human capital, and shows how these effects can be quantified using effective tax rates, or ETRs. The approach is illustrated using data for Canada. For individuals with median earnings, ETRs on the human capital formed in first-degree university study are sizeable, although not as large as for physical capital in Canada. When the expenditure side and its direct subsidies are also taken into account, the net effective tax rate on human capital becomes negative. The taxation of human capital is far from uniform. ETRs vary by income level, gender, part-time vs. full-time study, whether students have loans, number of dependants, and use of sheltered savings plans. Workers at higher percentile levels of the earnings distribution throughout life may face ETRs substantially higher than those for low-income workers, as a result of progressive income taxation.

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  • Kirk A. Collins & James B. Davies, 2002. "Measuring Effective Tax Rates on Human Capital: The Canadian Case," University of Western Ontario, Economic Policy Research Institute Working Papers 20025, University of Western Ontario, Economic Policy Research Institute.
  • Handle: RePEc:uwo:epuwoc:20025
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    1. Robin Boadway & Neil Bruce & Jack Mintz, 1984. "Taxation, Inflation, and the Effective Marginal Tax Rate on Capital in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 17(1), pages 62-79, February.
    2. Jim Davies, "undated". "Empirical Evidence on Human Capital Externalities," Working Papers-Department of Finance Canada 2003-11, Department of Finance Canada.
    3. James Davies & John Whalley, 1991. "Taxes and Capital Formation: How Important is Human Capital?," NBER Chapters,in: National Saving and Economic Performance, pages 163-200 National Bureau of Economic Research, Inc.
    4. Carneiro, Pedro & Heckman, James J., 2003. "Human Capital Policy," IZA Discussion Papers 821, Institute for the Study of Labor (IZA).
    5. Mervyn A. King & Don Fullerton, 1983. "The Taxation of Income from Capital: A Comparative Study of the U.S., U.K., Sweden, and West Germany--The Theoretical Framework--," NBER Working Papers 1058, National Bureau of Economic Research, Inc.
    6. Dupor, Bill, et al, 1996. "Some Effects of Taxes on Schooling and Training," American Economic Review, American Economic Association, vol. 86(2), pages 340-346, May.
    7. Theodore W. Schultz, 1962. "Reflections on Investment in Man," Journal of Political Economy, University of Chicago Press, vol. 70, pages 1-1.
    8. Kaplow, Louis, 1996. "On the Divergence between "Ideal" and Conventional Income-Tax Treatment of Human Capital," American Economic Review, American Economic Association, vol. 86(2), pages 347-352, May.
    9. James J. Heckman & Lance Lochner & Christopher Taber, 1999. "General Equilibrium Cost Benefit Analysis of Education and Tax Policies," NBER Working Papers 6881, National Bureau of Economic Research, Inc.
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