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Tax Progression and Human Capital in Imperfect Labour Markets

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  • Clemens Fuest
  • Bernd Huber

Abstract

Recent contributions to the theory of taxation argue that tax progression raises welfare and employment in the presence of labour market imperfections. This literature takes the endowment of workers with human capital as given. The present paper analyses the effects of tax progression in a model with endogenous human capital formation. We show that the effect of tax progression on human capital investment depends on the deductibility of the cost of human capital formation. With full deductibility, tax progression raises employment and welfare. With incomplete deductibility, in contrast, the effect of tax progression on employment and welfare may be negative.

Suggested Citation

  • Clemens Fuest & Bernd Huber, 2001. "Tax Progression and Human Capital in Imperfect Labour Markets," German Economic Review, Verein für Socialpolitik, vol. 2(1), pages 1-18, February.
    • Handle: RePEc:bla:germec:v:2:y:2001:i:1:p:1-18
    DOI: 10.1111/1468-0475.00024
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    References listed on IDEAS

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    1. B Bell & Stephen Nickell, 1996. "Would Cutting Payroll Taxes on the Unskilled Have a Significant Effect on Unemployment?," CEP Discussion Papers dp0276, Centre for Economic Performance, LSE.
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    Cited by:

    1. Bohringer, Christoph & Boeters, Stefan & Feil, Michael, 2005. "Taxation and unemployment: an applied general equilibrium approach," Economic Modelling, Elsevier, vol. 22(1), pages 81-108, January.
    2. Schindler Dirk, 2011. "Tuition Fees and the Dual Income Tax: The Optimality of the Nordic Income Tax System Reconsidered," German Economic Review, De Gruyter, vol. 12(1), pages 59-84, February.
    3. Florian Dorn & Clemens Fuest & Björn Kauder & Luisa Lorenz & Martin Mosler & Luisa Dörr, 2017. "The removal of the middle class bulge - models and costs," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 77.
    4. van Ewijk, Casper & Tang, Paul J.G., 2007. "Unions, progressive taxes, and education subsidies," European Journal of Political Economy, Elsevier, vol. 23(4), pages 1119-1139, December.
    5. Boeters, Stefan, 2011. "Optimal tax progressivity in unionised labour markets: What are the driving forces?," Economic Modelling, Elsevier, vol. 28(5), pages 2282-2295, September.
    6. Hungerbuhler, Mathias, 2007. "Tax progression and training in a matching framework," Labour Economics, Elsevier, vol. 14(2), pages 185-200, April.
    7. Wöhlbier, Florian, 2002. "Subsidising Education with Unionised Labour Markets," Discussion Papers in Economics 7, University of Munich, Department of Economics.
    8. Boeters, Stefan & Böhringer, Christoph & Feil, Michael, 2002. "Taxation and unemployment: an applied general equilibrium approach for Germany," ZEW Discussion Papers 02-39, ZEW - Leibniz Centre for European Economic Research.

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