Tax Policy, Investments in Human and Physical Capital, and Productivity
27 Pages Posted: 5 Jul 2004 Last revised: 27 Aug 2010
Date Written: December 1990
This paper analyzes the implications of tax policy for the accumulation of human and physical capital and for the overall productivity level of the economy. A comprehensive income tax, applying to both labour income and capital income. discriminates against investments in human capital relative to investments in physical capital. Hence. it has an adverse impact on human capital accumulation. Taking into account a positive external effect of investments in human capital on overall productivity, the adverse effect of income taxation on human capital investments is significantly magnified.
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