Human Capital and Optimal Positive Taxation of Capital Income

Bovenberg, A. Lans; Jacobs, Bas

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Human Capital and Optimal Positive Taxation of Capital Income

CEPR Discussion Paper No. 5047

45 Pages Posted: 15 Sep 2005

See all articles by A. Lans Bovenberg

A. Lans Bovenberg

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Bas Jacobs

Erasmus University Rotterdam (EUR); Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute)

There are 2 versions of this paper

Date Written: May 2005

Abstract

This paper analyzes optimal linear taxes on capital and labor incomes in a life-cycle model of human capital investment, financial savings, and labor supply with heterogenous individuals. A dual income tax with a positive marginal tax rate on not only labor income but also capital income is optimal. The positive tax on capital income serves to alleviate the distortions of the labor tax on human capital accumulation. The optimal marginal tax rate on capital income is lower than that on labor income if savings are elastic compared to investment in human capital; substitution between inputs in human capital formation is difficult; and most investments in human capital are verifiable. Numerical calculations suggest that the optimal marginal tax rate on capital income is close to the tax rate on labor income.

Keywords: Human capital, labor income taxation, capital income taxation, life cycle, education subsidies

JEL Classification: H2, H5, I2, J2

Suggested Citation: Suggested Citation

Bovenberg, A. Lans and Jacobs, Bas, Human Capital and Optimal Positive Taxation of Capital Income (May 2005). CEPR Discussion Paper No. 5047, Available at SSRN: https://ssrn.com/abstract=774289