Public Governance Considerations in Taxation of Human Capital: Efficiency, Equity and Justice

Abstract:     
This paper looks at public governance issues, such as efficiency, equity, fairness and transparency, related to government taxation and expense on human capital. Taxation of human capital requires ability to measure it. The paper proposes a new method of measuring human capital using the capitalized earnings approach but separating the labour component of earnings of an individual from the return to human capital. Thus it proposes capitalizing expected excess earnings. Difficulties remain, primarily in estimating changing risk rates and growth rates. If human capital cannot be measured and taxed, then we may need to tax its influents or its outcomes. The influents include education, experience, motivation, social capital, etc. On the outcome side, the government can tax the earnings from the human capital. No matter how the government intervenes, there is an excess burden with some deadweight loss. This means that government should either refrain from intervening or intervene through lump sum taxes, but the latter are politically unacceptable for reasons of equity. Even if the most efficient taxes are taken and the society is on its production possibility frontier, the distribution may be considered inequitable. If equity is important, we may need to redistribute human capital. In doing so, we need to consider tax equity between different factors of production (eg. labour and human capital). Tax Equity could also be considered between different forms of human capital (eg. public education and on the job training). Once a relatively efficient, fairly equitable system has been designed, it still needs to be executed judiciously. The legal review of European jurisprudence in the paper includes equality of opportunity for free mobility of labor for education and for earning after education, equality in obtaining public funds, subsidies or government contracts in education and ensuring that the subsidies and tax expenses are appropriately used.

Number of Pages in PDF File: 26

Keywords: Public governance, Education, skilled labor, valuation of human capital, fairness, tax

JEL Classification: D63, E62, G3, G38, H20, H21, H71, K34, J24, J41

working papers series