Optimal Taxation with Risky Human Capital

Marek Kapicka and Julian Neira

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

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 lowability agents are insured. The welfare gains from switching to an optimal tax system are large.

Keywords: optimal taxation; income taxation; human capital (search for similar items in EconPapers)
JEL-codes: E6 H2 (search for similar items in EconPapers)
Date: 2015-11
New Economics Papers: this item is included in nep-dge, nep-hrm, nep-mac, nep-pbe and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Optimal Taxation with Risky Human Capital (2019)
Working Paper: Optimal Taxation with Risky Human Capital (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:cer:papers:wp553

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