Taxation and human capital accumulation with endogenous mortality

Debajyoti Chakrabarty

The Japanese Economic Review, 2022, vol. 73, issue 4, No 1, 555-596

Abstract: Abstract We study the impact of taxation on human capital when the mortality of household agents is endogenously determined based on their past levels of consumption. We characterize and solve the dynamic optimization problem facing household agents in the economy. Even though all households in our economy have identical preferences and have access to the same human capital accumulation technology, with endogenous mortality, there is a possibility of multiple equilibria. Households with an initial endowment of human capital above a threshold choose to accumulate human capital, while those below the threshold end up with very low levels of human capital. We use empirical estimates of the income–mortality relationship in Canada, France, and the US to simulate our model. When income has a strong protective effect against mortality, we find that multiple equilibria are empirically plausible. Our simulations suggest that changes in proportional tax rates have more than twice the impact on aggregate human capital in the endogenous mortality model compared to the infinite horizon model.

Keywords: Endogenous mortality; Inter-temporal choice; Human capital; Taxation (search for similar items in EconPapers)
JEL-codes: D9 H2 I14 J24 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s42973-020-00071-7

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