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Reforming the Taxation of Human Capital: A Modest Proposal for Promoting Economic Growth

  • Paul A. David

    (Stanford University & University of Oxford)

A new scheme of personal income tax reform would eliminate the inefficiencies arising from differences in the tax treatment of investments in intangible human capital and other types of capital formation. It also would offset the exacerbation of those distortions caused by progressive taxation, without requiring abandonment of the latter principle. The proposed incremental reform of the personal income tax regime would permit full deductibility of private costs of education and training, but defer the exercise of the deduction credits. The novel instrument for achieving these objectives is an individually held, non- transferable asset: an untaxed, interest-bearing educational (expense) deduction account -- christened the “UIBEDA,” and pronounced: “we- bedda.” Under plausibly realistic assumptions about the time profile of education-associated earnings differentials, and the progressiveness of tax rate schedules, it is feasible for the Treasury adopting such a scheme to satisfy an intertemporal balanced budget constraint, while in effect acting as a financial intermediary in the market for human capital investments. The UIBEDA scheme facilitates shifting from direct educational subsidies to the use of publicly subsidized student loans, and also can be readily extended to promote selective immigration of workers who have incurred indebtedness for human capital investments abroad.

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Paper provided by EconWPA in its series HEW with number 0502002.

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Length: 29 pages
Date of creation: 10 Feb 2005
Date of revision:
Handle: RePEc:wpa:wuwphe:0502002
Note: Type of Document - pdf; pages: 29
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  1. Pedro Carneiro & James J. Heckman, 2002. "The Evidence on Credit Constraints in Post-Secondary Schooling," NBER Working Papers 9055, National Bureau of Economic Research, Inc.
  2. Stark, Oded & Wang, Yong, 2002. "Inducing human capital formation: migration as a substitute for subsidies," Journal of Public Economics, Elsevier, vol. 86(1), pages 29-46, October.
  3. Stark, Oded & Helmenstein, Christian & Prskawetz, Alexia, 1997. "A Brain Gain with a Brain Drain," Economics Series 45, Institute for Advanced Studies.
  4. James J. Heckman & Lance Lochner & Christopher Taber, 1998. "Explaining Rising Wage Inequality: Explorations with a Dynamic General Equilibrium Model of Labor Earnings with Heterogeneous Agents," NBER Working Papers 6384, National Bureau of Economic Research, Inc.
  5. James Heckman & Pedro Carneiro, 2003. "Human Capital Policy," NBER Working Papers 9495, National Bureau of Economic Research, Inc.
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  7. James J. Heckman, 1976. "Estimates of a Human Capital Production Function Embedded in a Life-Cycle Model of Labor Supply," NBER Chapters, in: Household Production and Consumption, pages 225-264 National Bureau of Economic Research, Inc.
  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 347-52, May.
  9. Judd, Kenneth L, 1998. "Taxes, Uncertainty, and Human Capital," American Economic Review, American Economic Association, vol. 88(2), pages 289-92, May.
  10. James Davies & John Whalley, 1989. "Taxes and Capital Formation: How Important is Human Capital?," NBER Working Papers 2899, National Bureau of Economic Research, Inc.
  11. Dupor, Bill, et al, 1996. "Some Effects of Taxes on Schooling and Training," American Economic Review, American Economic Association, vol. 86(2), pages 340-46, May.
  12. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Stephen V. Cameron & James J. Heckman, 1998. "Life Cycle Schooling and Dynamic Selection Bias: Models and Evidence for Five Cohorts of American Males," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 262-333, April.
  14. Andrea Bassanini & Stefano Scarpetta & Philip Hemmings, 2001. "Economic Growth: The Role of Policies and Institutions: Panel Data. Evidence from OECD Countries," OECD Economics Department Working Papers 283, OECD Publishing.
  15. Trostel, Philip A, 1993. "The Effect of Taxation on Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 327-50, April.
  16. Paul A David (with the assistance of John Gabriel Goddard Lopez), 2000. "Knowledge, Capabilities and Human Capital Formation in Economic Growth," Treasury Working Paper Series 01/13, New Zealand Treasury, revised 10 Apr 2001.
  17. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, vol. 70(4), pages 705-15, September.
  18. B. Douglas Bernheim & John B. Shoven, 1991. "National Saving and Economic Performance," NBER Books, National Bureau of Economic Research, Inc, number bern91-2, December.
  19. Steuerle, C Eugene, 1996. "How Should Government Allocate Subsidies for Human Capital?," American Economic Review, American Economic Association, vol. 86(2), pages 353-57, May.
  20. Andrea Bassanini & Stefano Scarpetta, 2001. "Does Human Capital Matter for Growth in OECD Countries?: Evidence from Pooled Mean-Group Estimates," OECD Economics Department Working Papers 282, OECD Publishing.
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