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Optimal Wage Taxation When Human Capital And Employment Are Endogenous

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  • BRENT KREIDER

Abstract

This paper studies how optimal wage tax conclusions from the classic two‐period life cycle model of human capital accumulation are affected by endogenizing the number of taxpaying workers. In the absence of a corrective policy, young individuals underinvest in human capital from a social perspective because tax premiums for transfers to nonworkers are not actuarially adjusted downward for human capital attainment. A combination of wage taxes and wage subsidies can restore proper price signals. Numerical simulations suggest that even modest employment elasticities can be sufficient to substantially impact the magnitudes and even the signs of optimal wage tax rates. (JEL H21, H3, J24)

Suggested Citation

  • Brent Kreider, 2008. "Optimal Wage Taxation When Human Capital And Employment Are Endogenous," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 660-675, October.
    • Handle: RePEc:bla:ecinqu:v:46:y:2008:i:4:p:660-675
    DOI: 10.1111/j.1465-7295.2007.00096.x
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    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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