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Taxing Capital? The Importance of How Human Capital is Accumulated

William Peterman

No 2015-117, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper considers the impact of how human capital is accumulated on optimal capital tax policy in a life cycle model. In particular, it compares the optimal capital tax when human capital is accumulated exogenously, endogenously through learning-by-doing, and endogenously through learning-or-doing. Previous work demonstrates that in a simple two generation life cycle model with exogenous human capital accumulation, if the utility function is separable and homothetic in each consumption and labor, then the government has no motive to condition taxes on age or tax capital. In contrast, this paper demonstrates analytically that adding either form of endogenous human capital accumulation creates a motive for the government to use age-dependent labor income taxes. Moreover, if the government cannot condition taxes on age, then a capital tax can be optimal in order to mimic such taxes. This paper quantitatively explores the strength of this channel and finds that, including human capital accumulation with learning-by-doing, as opposed to exogenously, causes the optimal capital tax to increase by between 7.3 and 14.5 percentage points. In contrast, introducing learning-or-doing causes a much smaller increase in the optimal capital tax of between 0.7 and 3.7 percentage points. Taken as a whole, this paper finds that the specific formulation by which human capital is accumulated can have notable implications on the optimal capital tax.

Keywords: Optimal Taxation; Capital Taxation; Human Capital (search for similar items in EconPapers)
JEL-codes: E24 E62 H21 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2015-12-29
New Economics Papers: this item is included in nep-dge, nep-hrm, nep-mac, nep-pbe, nep-pub and nep-upt
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Citations: View citations in EconPapers (1)

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http://www.federalreserve.gov/econresdata/feds/2015/files/2015117pap.pdf Full text (application/pdf)
http://dx.doi.org/10.17016/FEDS.2015.117 DOI (application/pdf)

Related works:
Journal Article: Taxing capital? The importance of how human capital is accumulated (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2015-117

DOI: 10.17016/FEDS.2015.117

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