The Effect of Endogenous Human Capital Accumulation on Optimal Taxation

48 Pages Posted: 26 Jan 2012

See all articles by William Peterman

William Peterman

Board of Governors of the Federal Reserve System

Date Written: January 1, 2012

Abstract

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.

Keywords: Optimal taxation, capital taxation, human capital

JEL Classification: E24, E62, H21

Suggested Citation

Peterman, William, The Effect of Endogenous Human Capital Accumulation on Optimal Taxation (January 1, 2012). FEDS Working Paper No. 2012-03, Available at SSRN: https://ssrn.com/abstract=1991840 or http://dx.doi.org/10.2139/ssrn.1991840

William Peterman (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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