IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_965.html
   My bibliography  Save this paper

Measuring Effective Tax Rates on Human Capital: Methodology and an Application to Canada

Author

Listed:
  • Kirk A. Collins
  • James Davies

Abstract

This paper examines the impacts of a wide range of tax provisions on the incentive to invest in human capital, and shows how these effects can be quantified using effective tax rates, or ETRs. For individuals with median earnings, ETRs on the human capital formed in first-degree university study are sizeable, although not as large as those estimated by previous authors for physical capital in Canada. When the expenditure side and its direct subsidies are also taken into account, the net effective tax rate on human capital becomes negative. The taxation of human capital is far from uniform. ETRs vary by income level, gender, part-time vs. full-time study, whether students have loans, number of dependants, and use of RESPs. The most significant differences are those related to income level. Workers at higher percentile levels of the earnings distribution throughout life may face ETRs three times as high as those for low-income workers – a result of our progressive income tax system.

Suggested Citation

  • Kirk A. Collins & James Davies, 2003. "Measuring Effective Tax Rates on Human Capital: Methodology and an Application to Canada," CESifo Working Paper Series 965, CESifo.
    • Handle: RePEc:ces:ceswps:_965
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo_wp965.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Robin Boadway & Neil Bruce & Jack Mintz, 1984. "Taxation, Inflation, and the Effective Marginal Tax Rate on Capital in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 17(1), pages 62-79, February.
    2. Graham Glenday & James B. Davies, 1990. "Accrual Equivalent Marginal Tax Rates for Personal Financial Assets," Canadian Journal of Economics, Canadian Economics Association, vol. 23(1), pages 189-209, February.
    3. Lans Bovenberg, A. & Jacobs, Bas, 2005. "Redistribution and education subsidies are Siamese twins," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2005-2035, December.
    4. Mervyn A. King & Don Fullerton, 1984. "The United Kingdom," NBER Chapters, in: The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany, pages 31-86, National Bureau of Economic Research, Inc.
    5. Pecorino, Paul, 1993. "Tax structure and growth in a model with human capital," Journal of Public Economics, Elsevier, vol. 52(2), pages 251-271, September.
    6. James Davies & John Whalley, 1991. "Taxes and Capital Formation: How Important is Human Capital?," NBER Chapters, in: National Saving and Economic Performance, pages 163-200, National Bureau of Economic Research, Inc.
    7. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    8. Carneiro, Pedro & Heckman, James J., 2003. "Human Capital Policy," IZA Discussion Papers 821, Institute of Labor Economics (IZA).
    9. Mervyn A. King & Don Fullerton, 1983. "The Taxation of Income from Capital: A Comparative Study of the U.S., U.K., Sweden, and West Germany--The Theoretical Framework--," NBER Working Papers 1058, National Bureau of Economic Research, Inc.
    10. Dupor, Bill, et al, 1996. "Some Effects of Taxes on Schooling and Training," American Economic Review, American Economic Association, vol. 86(2), pages 340-346, May.
    11. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
    12. Shea, John, 2000. "Does parents' money matter?," Journal of Public Economics, Elsevier, vol. 77(2), pages 155-184, August.
    13. James B. Davies & Jie Zhang & Jinli Zeng, 2000. "Optimal Tax Mix in a Two-Sector Growth Model with Transitional Dynamics," University of Western Ontario, Departmental Research Report Series 200017, University of Western Ontario, Department of Economics.
    14. 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 347-352, May.
    15. Mervyn A. King & Don Fullerton, 1984. "Introduction to "The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany"," NBER Chapters, in: The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany, pages 1-6, National Bureau of Economic Research, Inc.
    16. Perroni, Carlo, 1995. "Assessing the Dynamic Efficiency Gains of Tax Reform When Human Capital Is Endogenous," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 907-925, November.
    17. Mervyn A. King & Don Fullerton, 1984. "The United States," NBER Chapters, in: The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany, pages 193-267, National Bureau of Economic Research, Inc.
    18. Jones, Larry E. & Manuelli, Rodolfo E. & Rossi, Peter E., 1997. "On the Optimal Taxation of Capital Income," Journal of Economic Theory, Elsevier, vol. 73(1), pages 93-117, March.
    19. Michael J. Boskin, 1975. "Notes on the Tax Treatment of Human Capital," NBER Working Papers 0116, National Bureau of Economic Research, Inc.
    20. Nielsen, Soren Bo & Sorensen, Peter Birch, 1997. "On the optimality of the Nordic system of dual income taxation," Journal of Public Economics, Elsevier, vol. 63(3), pages 311-329, February.
    21. Mervyn A. King & Don Fullerton, 1984. "The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany," NBER Books, National Bureau of Economic Research, Inc, number king84-1.
    22. James J. Heckman & Lance Lochner & Christopher Taber, 1999. "General Equilibrium Cost Benefit Analysis of Education and Tax Policies," NBER Working Papers 6881, National Bureau of Economic Research, Inc.
    23. Daron Acemoglu & Joshua Angrist, 1999. "How Large are the Social Returns to Education? Evidence from Compulsory Schooling Laws," NBER Working Papers 7444, National Bureau of Economic Research, Inc.
    24. Stephen Cameron & Christopher Taber, 2000. "Borrowing Constraints and the Returns to Schooling," NBER Working Papers 7761, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pierre Salmon, 2003. "The assignment of powers in an open-ended European Union," Post-Print hal-00445601, HAL.
    2. Christine Neill, 2013. "What You Don't Know Can't Help You: Lessons of Behavioural Economics for Tax-Based Student Aid," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 393, November.
    3. Richter, Wolfram F. & Braun, Christoph, 2009. "Efficient Subsidization of Human Capital Accumulation with Overlapping Generations and Endogenous Growth," IZA Discussion Papers 4629, Institute of Labor Economics (IZA).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lans Bovenberg, A. & Jacobs, Bas, 2005. "Redistribution and education subsidies are Siamese twins," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2005-2035, December.
    2. Kirk A. Collins & James B. Davies, 2002. "Measuring Effective Tax Rates on Human Capital: The Canadian Case," University of Western Ontario, Economic Policy Research Institute Working Papers 20025, University of Western Ontario, Economic Policy Research Institute.
    3. Chaitali Sinha, 2014. "Human Capital and Public Policy," South Asian Journal of Macroeconomics and Public Finance, , vol. 3(1), pages 79-125, June.
    4. John B. Burbidge & Kirk A. Collins & James B. Davies & Lonnie Magee, 2012. "Effective tax and subsidy rates on human capital in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 45(1), pages 189-219, February.
    5. Bas Jacobs & A. Bovenberg, 2010. "Human capital and optimal positive taxation of capital income," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(5), pages 451-478, October.
    6. Gechert, Sebastian & Heimberger, Philipp, 2022. "Do corporate tax cuts boost economic growth?," European Economic Review, Elsevier, vol. 147(C).
    7. Darrel Cohen & Kevin Hassett & R. Glenn Hubbard, 1999. "Inflation and the User Cost of Capital: Does Inflation Still Matter?," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 199-234, National Bureau of Economic Research, Inc.
    8. James Alm & Mir Ahmad Khan, 2015. "Assessing and Reforming Enterprise Taxation in Pakistan," Working Papers 1513, Tulane University, Department of Economics.
    9. Michael Funke & Holger Strulik, 2006. "Taxation, Growth and Welfare: Dynamic Effects of Estonia's 2000 Income Tax Act," Finnish Economic Papers, Finnish Economic Association, vol. 19(1), pages 25-38, Spring.
    10. Wolfram F. Richter, 2007. "Efficient Tax Policy Ranks Education Higher than Saving," CESifo Working Paper Series 2106, CESifo.
    11. Michael Funke & Holger Strulik, 2006. "Taxation, Growth and Welfare: Dynamic Effects of Estonia's 2000 Income Tax Act," Finnish Economic Papers, Finnish Economic Association, vol. 19(1), pages 25-38, Spring.
    12. Marcel Gérard, 2002. "Tax Competition, the Distribution of MNE's Ownership and the Wage Formation Process," CESifo Working Paper Series 631, CESifo.
    13. Engen, Eric M. & Skinner, Jonathan, 1996. "Taxation and Economic Growth," National Tax Journal, National Tax Association;National Tax Journal, vol. 49(4), pages 617-642, December.
    14. Cummins, Jason G. & Hassett, Kevin A. & Hubbard, R. Glenn, 1996. "Tax reforms and investment: A cross-country comparison," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 237-273, October.
    15. Stenkula, Mikael & Wykman, Niklas, 2022. "The Taxation of Closely Held Firms: The Achilles Heel of the Dual Income Tax System Reconsidered," Working Paper Series 1434, Research Institute of Industrial Economics.
    16. Kenneth J. McKenzie & Jack M. Mintz & Kimberly A. Scharf, 1997. "Measuring Effective Tax Rates in the Presence of Multiple Inputs: A Production Based Approach," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 4(3), pages 337-359, July.
    17. Peter Birch Sørensen, 2014. "Taxation and the Optimal Constraint on Corporate Debt Finance," CESifo Working Paper Series 5101, CESifo.
    18. Michael Devereux, 2003. "Measuring taxes on income from capital," IFS Working Papers W03/04, Institute for Fiscal Studies.
    19. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
    20. Jason Cummins & R. Glenn Hubbard, 1995. "The Tax Sensitivity of Foreign Direct Investment: Evidence from Firm-Level Panel Data," NBER Chapters, in: The Effects of Taxation on Multinational Corporations, pages 123-152, National Bureau of Economic Research, Inc.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_965. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.