Taxing Human Capital: A Good Idea
30 Pages Posted: 14 Nov 2010
Date Written: November 12, 2010
This paper studies a Ramsey optimal taxation model with human capital in an infinite-horizon setting. Contrary to Jones, Manuelli, and Rossi (1997), the human capital production function does not include the current stock of human capital as a production factor. As a result, the return to human capital, namely labor income, does not vanish in equilibrium. In a stationary state, the household underinvests in human capital relative to the fi rst best, i.e., education is distorted. Human capital is effectively taxed. The optimal tax scheme prescribes making the cost of education not fully tax-deductible.
Keywords: Optimal Taxation, Human Capital, Ramsey Approach
JEL Classification: H21, I28, J24
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