The Effect of Endogenous Human Capital Accumulation on Optimal Taxation
The Federal Reserve Board of Governors
January 1, 2012
FEDS Working Paper No. 2012-03
This paper considers the impact of endogenous human capital accumulation on optimal tax policy in a life cycle model. Including endogenous human capital accumulation, either through learning-by-doing or learning-or-doing, is analytically shown to create a motive for the government to use age-dependent labor income taxes. If the government cannot condition taxes on age, then it is optimal to use a tax on capital in order to mimic such taxes. Quantitatively, introducing learning-by-doing or learning-or-doing increases the optimal tax on capital by forty or four percent, respectively. Overall, the optimal tax on capital is thirty five percent higher in the model with learning-by-doing compared to the model with learning-or-doing implying that how human capital accumulates is of significant importance when determining the optimal tax policy.
Number of Pages in PDF File: 48
Keywords: Optimal taxation, capital taxation, human capital
JEL Classification: E24, E62, H21working papers series
Date posted: January 26, 2012
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