Human Capital External Effect and Taxation of Physical Capital Income

13 Pages Posted: 28 Feb 2006

See all articles by Sergey Mityakov

Sergey Mityakov

Florida State University - Department of Finance

Date Written: February 13, 2006

Abstract

It is commonly believed that taxation of physical capital is "a bad idea". Whereas in reality many countries do levy heavy taxes on capital income. In this paper we show that taxation of physical capital can be justified when there is non-convexity of technology due to human capital external effect. We demonstrate that taxation of capital income should be implemented via residence-based taxation, that is, to increase the welfare of the residents of the country, the government has to levy the entire tax burden only on them. We also show that source-based taxation reduces welfare.

Keywords: human capital, capital income taxation, education subsidies

JEL Classification: H2, H5, I2, J2

Suggested Citation

Mityakov, Sergey, Human Capital External Effect and Taxation of Physical Capital Income (February 13, 2006). Available at SSRN: https://ssrn.com/abstract=884019 or http://dx.doi.org/10.2139/ssrn.884019

Sergey Mityakov (Contact Author)

Florida State University - Department of Finance ( email )

Tallahassee, FL 32306-1042
United States

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