Optimal Taxation of Risky Human Capital

33 Pages Posted: 27 Jan 2009

See all articles by Bas Jacobs

Bas Jacobs

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

Dirk Schindler

Erasmus School of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Hongyan Yang

University of Konstanz

Date Written: January 1, 2009

Abstract

In a model with ex-ante homogenous households, earnings risk and a general earnings function, we derive the optimal linear labor tax rate and optimal linear education subsidies. The optimal income tax trades off social insurance against incentives to work and to invest in human capital. Education subsidies are not used for social insurance, but are only targeted at off-setting the distortions of the labor tax and internalizing a fiscal externality. Both optimal education subsidies and tax rates increase if labor and education are more complementary, since education subsidies indirectly lower labor tax distortions by stimulating labor supply. Optimal education subsidies (taxes) also correct non-tax distortions arising from missing insurance markets. Education subsidies internalize a positive (negative) fiscal externality if there is underinvestment (overinvestment) in education due to risk. Education policy unambiguously allows for more social insurance if education is a risky activity. However, if education hedges against labor market risk, optimal tax rates could be lower than without education subsidies.

Keywords: labor taxation, human capital investment, education subsidies, idiosyncratic risk, risk properties of human capital

JEL Classification: H21, I2, J2

Suggested Citation

Jacobs, Bas and Schindler, Dirk and Yang, Hongyan, Optimal Taxation of Risky Human Capital (January 1, 2009). CESifo Working Paper Series No. 2529, Available at SSRN: https://ssrn.com/abstract=1333518 or http://dx.doi.org/10.2139/ssrn.1333518

Bas Jacobs (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

PO Box 1738
Rotterdam, Zuid-Holland 3000 DR
Netherlands
+314081452 (Phone)

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

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Dirk Schindler

Erasmus School of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Hongyan Yang

University of Konstanz ( email )

Fach D-144
Universitätsstraße 10
Konstanz, D-78457
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
82
Abstract Views
2,642
Rank
566,307
PlumX Metrics