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Taxing Human Capital Efficiently: The Double Dividend of Taxing Non-Qualified Labour More Heavily Than Qualified Labour

Wolfram Richter

No 2328, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Assuming decreasing returns to education and the endogenous supply of qualified and non-qualified labour it is shown to be efficient to supplement a consumption tax with positive incentives for education. If the return from education is isoelastic and if the choice is between (i) subsidizing the monetary cost of education and (ii) taxing non-qualified labour income more heavily than qualified labour income while keeping the effective cost of education constant, the latter policy is shown to be second-best efficient. In particular, any tax distortions should be constrained to labour choices while the choice of education should remain undistorted. The result holds for arbitrary utility functions.

Keywords: human capital investment; efficient taxation; endogenous choice of labour and education; double dividend hypothesis (search for similar items in EconPapers)
JEL-codes: H2 I2 J24 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2006-09
New Economics Papers: this item is included in nep-edu, nep-hrm, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published - revised version based on DP 2328 and DP 3451 published as "Taxing education in Ramsey's tradition" in: Journal of Public Economics, 2009, 93 (11-12), 1254-1260

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Working Paper: Taxing Human Capital Efficiently – The Double Dividend of Taxing Nonqualified Labour More Heavily Than Qualified Labour (2007) Downloads
Working Paper: Taxing Human Capital Efficiently: The Double Dividend of Taxing Non-qualified Labour more Heavily than Qualified Labour (2006) Downloads
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