Risky Human Capital and Deferred Capital Income Taxation
66 Pages Posted: 7 Dec 2012
There are 2 versions of this paper
Risky Human Capital and Deferred Capital Income Taxation
Date Written: December 1, 2006
Abstract
We study the structure of optimal wedges and capital taxes in a Mirrlees economy with endogenous skills. Human capital is a private state variable that drives the skill process of each individual. Building on the findings of the labor literature, we assume that human capital investment is a) risky, b) made early in the life-cycle, and c) hard to distinguish from consumption. These assumptions lead to 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 stemming from the lack of Rogerson's [Econometrica, 1985] "inverse Euler" characterization of the optimal consumption process, and c) an intra-temporal distortion of the effort/consumption margin even at the top of the skill distribution at all dates except the terminal date. The main implication for the structure of linear capital taxes is the necessity of deferred taxation of physical capital. In particular, deferred taxation of capital prevents the agents from making a joint deviation of under-investing in human capital ex ante and shirking from labor effort at some future date in the life-cycle, as the marginal deferred tax rate on physical capital held early in the life-cycle is history-dependent. The average marginal tax rate on physical capital held in every period is zero in present value. Thus, as in Kocherlakota [Econometrica, 2005], the government revenue from capital taxation is zero. However, since a portion of the capital tax must be deferred, expected capital tax payments cannot be zero in every period. Necessarily, agents face negative expected capital tax payments due early in the life-cycle and positive expected capital tax payments late in the life-cycle. Also, relative to economies with exogenous skills, the optimal marginal wealth tax rate is more volatile.
Keywords: optimal taxation, private information, human capital, deferred tax
JEL Classification: E62, H21, J24
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Redistribution and Education Subsidies are Siamese Twins
By A. Lans Bovenberg and Bas Jacobs
-
Redistribution and Education Subsidies are Siamese Twins
By A. Lans Bovenberg and Bas Jacobs
-
On the Optimal Taxation of Capital Income
By Larry Jones, Rodolfo Manuelli, ...
-
Optimal Taxation of Human and Physical Capital in Endogenous Capital Models
-
Optimal Taxation of Risky Human Capital
By Bas Jacobs, Dirk Schindler, ...
-
Optimal Taxation of Human Capital and the Earnings Function
By Bas Jacobs and A. Lans Bovenberg
-
Optimal Taxation in Theory and Practice
By N. Gregory Mankiw, Matthew Weinzierl, ...
-
Human Capital and Optimal Positive Taxation of Capital Income
By Bas Jacobs and A. Lans Bovenberg