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
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)
New Economics Papers: this item is included in nep-dge, nep-hrm, nep-mac, nep-pbe and nep-upt
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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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