Optimal Taxation of Human Capital and the Earnings Function

22 Pages Posted: 19 Mar 2008

See all articles by Bas Jacobs

Bas Jacobs

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

A. Lans Bovenberg

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

Date Written: March 2008

Abstract

This paper explores how the specification of the earnings function impacts the optimal tax treatment of human capital. If education is complementary to labor effort, education should be subsidized to offset tax distortions on labor supply. However, if most of the education is enjoyed by high ability households, education should be taxed in order to redistribute resources to the poor. The paper identifies the exact conditions under which these two effects cancel and education should be neither taxed nor subsidized. In particular, with non-linear tax instruments, education should be weakly separable from labor and ability in the earnings function. With linear taxes, education should also feature a constant elasticity in a weakly separable earnings function.

Keywords: optimal linear and non-linear taxation, optimal education subsidies, human capital, earnings function

JEL Classification: H2, H5, I2, J2

Suggested Citation

Jacobs, Bas and Bovenberg, A. Lans, Optimal Taxation of Human Capital and the Earnings Function (March 2008). CESifo Working Paper Series No. 2250, Available at SSRN: https://ssrn.com/abstract=1107779 or http://dx.doi.org/10.2139/ssrn.1107779

Bas Jacobs (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

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HOME PAGE: http://personal.eur.nl/bjacobs

Tinbergen Institute ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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A. Lans Bovenberg

Tilburg University - Center for Economic Research (CentER) ( email )

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+31 13 466 2912 (Phone)
+31 13 466 3066 (Fax)

Centre for Economic Policy Research (CEPR)

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United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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