The Dynamics of Optimal Taxation when Human Capital is Endogenous

Marek Kapicka

No 349, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: This paper characterizes the dynamics of Pareto efficient income taxes in a dynamic economy with human capital accumulation. I extend the tools and insights developed by Mirrlees (1971) into a dynamic framework. I follow Diamond (1998) by assuming that there are no income effects on labor supply. If the government can freely borrow and save, I show that i) the problem of finding efficient allocation can be decomposed into two relatively simple stages and ii) if agents have access to capital market (with zero tax on capital), the efficient allocations may be in some cases implemented in a competitive equilibrium by using history independent income taxes. I compute the sequence of optimal income taxes that implement the optimum and show that they marginal income taxes tend to decrease over time and that the gains from adjustment of human capital are about 12 times larger than the static gains from labor supply adjustment

Keywords: Optimal taxation; private information; human capital (search for similar items in EconPapers)
JEL-codes: E6 H21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-pub
Date: 2006-12-03
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