Risky Human Capital and Deferred Capital Income Taxation

Journal of Economic Theory, Vol. 145, No. 3, pp. 908-943, 2010

36 Pages Posted: 27 Oct 2011

See all articles by Borys Grochulski

Borys Grochulski

Federal Reserve Banks - Federal Reserve Bank of Richmond

Tomasz Piskorski

Columbia University - Columbia Business School, Finance

Multiple version iconThere are 2 versions of this paper

Date Written: 2010

Abstract

We study the structure of optimal wedges and capital taxes in a dynamic Mirrlees economy with endogenous distribution of skills. Human capital is a private, stochastic state variable that drives the skill process of each individual. Building on the findings of the labor literature, we construct a tractable life-cycle model of human capital evolution with risky investment and stochastic depreciation. In this setting, we demonstrate the optimality of (a) a human capital premium, i.e., an excess return on human capital relative to physical capital, (b) a large intertemporal wedge early in the life-cycle, and (c) a non-zero intratemporal wedge even at the top of the skill distribution at all dates except the last date in the life-cycle. The main implication for the structure of optimal linear capital taxes is the necessity of deferred taxation of physical capital. The average marginal tax rate on physical capital held in every period is zero in present value. However, expected capital tax payments do not equal zero in every period. Necessarily, agents face negative expected capital tax payments early in the life-cycle and positive expected capital tax payments late in the life-cycle.

Suggested Citation

Grochulski, Borys and Piskorski, Tomasz, Risky Human Capital and Deferred Capital Income Taxation (2010). Journal of Economic Theory, Vol. 145, No. 3, pp. 908-943, 2010, Available at SSRN: https://ssrn.com/abstract=1949316

Borys Grochulski

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

HOME PAGE: http://www.richmondfed.org/research/economists/bios/grochulski_bio.cfm

Tomasz Piskorski (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

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