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Does the Progressivity of Income Taxes Matter for Human Capital and Growth?

Elizabeth Caucutt (), Selahattin İmrohoroğlu and Krishna Kumar ()

Journal of Public Economic Theory, 2006, vol. 8, issue 1, 95-118

Abstract: We develop a model with heterogeneity in skills to study the effect of tax progressivity on economic growth. The probability of becoming skilled depends positively on expenses on teacher time. We consider growth resulting from an externality due to skilled workers and from their employment in research and development. We show changes in the progressivity of taxes can have growth effects even when changes in flat rate taxes have none. The response is stronger with externality‐driven growth. Progressive taxation, often suggested to reduce inequality, can increase the long‐run skill premium and decrease the upward mobility of the poor.

Date: 2006
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Handle: RePEc:bla:jpbect:v:8:y:2006:i:1:p:95-118