Optimal Taxation of Human Capital and the Earnings Function

Bas Jacobs and Lans Bovenberg

No 2250, CESifo Working Paper Series from CESifo

Abstract: This paper explores how the specification of the earnings function impacts the optimal tax treatment of human capital. If education is complementary to labor effort, education should be subsidized to offset tax distortions on labor supply. However, if most of the education is enjoyed by high ability households, education should be taxed in order to redistribute resources to the poor. The paper identifies the exact conditions under which these two effects cancel and education should be neither taxed nor subsidized. In particular, with non-linear tax instruments, education should be weakly separable from labor and ability in the earnings function. With linear taxes, education should also feature a constant elasticity in a weakly separable earnings function.

Keywords: optimal linear and non-linear taxation; optimal education subsidies; human capital; earnings function (search for similar items in EconPapers)
JEL-codes: H20 H50 I20 J20 (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Related works:
Journal Article: Optimal Taxation of Human Capital and the Earnings Function (2011)
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