Optimal Taxation with Risky Human Capital

CERGE-EI Working Paper Series No. 553

41 Pages Posted: 8 Dec 2015

See all articles by Marek Kapicka

Marek Kapicka

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Julian Neira

University of Exeter

Date Written: December 1, 2015

Abstract

We study optimal tax policies in a life-cycle economy with risky human capital and permanent ability differences. The optimal policies balance redistribution across agents, insurance against human capital shocks, and incentives to learn and work. In the optimum, i) if utility is separable in labor and learning effort, the inverse labor wedge follows a random walk, ii) if the utility is not separable then the “no distortion at the top” result does not apply, and iii) quantitatively, high-ability agents face very risky consumption while low-ability agents are insured. The welfare gains from switching to an optimal tax system are large.

Keywords: optimal taxation, income taxation, human capital

JEL Classification: E6, H2

Suggested Citation

Kapicka, Marek and Neira, Julian, Optimal Taxation with Risky Human Capital (December 1, 2015). CERGE-EI Working Paper Series No. 553, Available at SSRN: https://ssrn.com/abstract=2700607 or http://dx.doi.org/10.2139/ssrn.2700607

Marek Kapicka (Contact Author)

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

Julian Neira

University of Exeter ( email )

Streatham Court
Rennes Drive
Exeter, Devon EX4 4PU
United Kingdom

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