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Optimal Income Taxation with Human Capital Accumulation and Limited Record Keeping

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Author Info
Marek Kapicka (University of California, Santa Barbara)

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Abstract

This paper characterizes optimal income taxes in a dynamic economy where human capital is unobservable and the government is restricted to use taxes that depend only on current income. I show that unobservability of human capital tends to decrease the labor wedge, while the effect on the human capital wedge is uncertain. I also analyze the relationship between optimal taxes in economies with and without endogenous human capital and identify two qualitative reasons why the optimal tax codes will differ. I perform numerical simulations to calculate the quantitative relevance of endogenous human capital formation for optimal tax policy. I find that endogenous human capital lowers marginal tax rates by about 9% on average, as compared with a static model without human capital. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2006.05.003
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Publisher Info
Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 9 (2006)
Issue (Month): 4 (October)
Pages: 612-639
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Handle: RePEc:red:issued:05-24

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Related research
Keywords: Optimal taxation Income taxation Human capital

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Find related papers by JEL classification:
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
H2 - Public Economics - - Taxation, Subsidies, and Revenue

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Marek Kapicka, 2006. "The Dynamics of Optimal Taxation when Human Capital is Endogenous," 2006 Meeting Papers 349, Society for Economic Dynamics. [Downloadable!]
  2. Fernandes, Ana & Phelan, Christopher, 2000. "A Recursive Formulation for Repeated Agency with History Dependence," Journal of Economic Theory, Elsevier, vol. 91(2), pages 223-247, April. [Downloadable!] (restricted)
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  3. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2003. "Optimal Indirect and Capital Taxation," Review of Economic Studies, Blackwell Publishing, vol. 70(3), pages 569-587, 07. [Downloadable!] (restricted)
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  4. Abraham, Arpad & Pavoni, Nicola, 2004. "Efficient Allocations with Moral Hazard and Hidden Borrowing and Lending," Working Papers 04-05, Duke University, Department of Economics. [Downloadable!]
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  5. Erosa, Andres & Koreshkova, Tatyana, 2007. "Progressive taxation in a dynastic model of human capital," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 667-685, April. [Downloadable!] (restricted)
  6. Juan Carlos Conesa & Dirk Krueger, 2005. "On the Optimal Progressivity of the Income Tax Code," CFS Working Paper Series 2005/10, Center for Financial Studies. [Downloadable!]
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  7. Stefania Albanesi & Christopher Sleet, 2006. "Dynamic Optimal Taxation with Private Information," Review of Economic Studies, Blackwell Publishing, vol. 73(1), pages 1-30, 01. [Downloadable!] (restricted)
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  8. Marco Battaglini & Stephen Coate, 2003. "Pareto Efficient Income Taxation with Stochastic Abilities," NBER Working Papers 10119, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Blackwell Publishing, vol. 38(114), pages 175-208, April. [Downloadable!] (restricted)
  10. J. A. Mirrlees, 1976. "Optimal Tax Theory: A Synthesis," Working papers 176, Massachusetts Institute of Technology (MIT), Department of Economics.
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  11. Narayana R. Kocherlakota, 2005. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Econometrica, Econometric Society, vol. 73(5), pages 1587-1621, 09. [Downloadable!] (restricted)
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  12. Craig Brett & John A. Weymark, 2000. "Financing Education Using Optimal Redistributive Taxation," Working Papers 0038, Department of Economics, Vanderbilt University, revised May 2001. [Downloadable!]
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  13. Elizabeth M. Caucutt & Selahattin Imrohoroglu & Krishna B. Kumar, 2000. "Does the progressivity of taxes matter for economic growth?," Discussion Paper / Institute for Empirical Macroeconomics 138, Federal Reserve Bank of Minneapolis. [Downloadable!]
  14. Saez, Emmanuel, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Blackwell Publishing, vol. 68(1), pages 205-29, January.
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  15. Marek Kapicka, 2004. "Optimal taxation with persistent shocks," 2004 Meeting Papers 689, Society for Economic Dynamics.
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  16. 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. [Downloadable!] (restricted)
  17. Narayana Kocherlakota, 2004. "Figuring out the Impact of Hidden Savings on Optimal Unemployment Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 541-554, July. [Downloadable!] (restricted)
  18. 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. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Borys Grochulski & Tomasz Piskorski, 2007. "Risky human capital and deferred capital income taxation," Working Paper 06-13, Federal Reserve Bank of Richmond. [Downloadable!]
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This page was last updated on 2008-10-30.

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