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Marginal Welfare Costs of Taxation with Human and Physical Capital

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Author Info
Sam Allgood
Arthur Snow
Abstract

We develop a perfect foresight, overlapping generations model with intragenerational inequality and endogenous human and physical capital investment, and we calculate welfare costs for marginal reforms of taxation and public spending. Welfare costs are uniformly lower than in the equivalent static model where human and physical capital are fixed. Most of the upward bias in static estimates arises from fixed human capital because welfare cost is predominantly tax leakage from lower effective labor supply, but reallocating time between education and labor can leave effective labor supply unchanged. Hence, adjustments in human capital have an important mitigating influence on marginal welfare costs. (JEL D91, H20, H31, H41, J22, J24) Copyright 2006, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/ei/cbj024
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Article provided by Oxford University Press in its journal Economic Inquiry.

Volume (Year): 44 (2006)
Issue (Month): 3 (July)
Pages: 451-464
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Handle: RePEc:oup:ecinqu:v:44:y:2006:i:3:p:451-464

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Keywords:

Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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This page was last updated on 2009-10-23.

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