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The Impact of Taxes and Transfers on Skill Premium

Shuhei Takahashi and Ken Yamada

No 976, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: The level of wage inequality has varied across advanced industrial countries. One of the main reasons has been a significant difference in the skill wage premium. This study analyzes the impact of taxes and transfers on the skill wage premium and social welfare in the context of a heterogeneous-agents incomplete-markets model, in which the population consists of skilled workers and unskilled workers, and the production technology exhibits capital-skill complementarity. The analysis indicates that a significant fraction of the difference in the skill wage premium between the United States and Japan can be accounted for by differences in the tax system.

Keywords: Skill premium; capital-skill complementarity; incomplete markets; capital income taxation; composition effect (search for similar items in EconPapers)
JEL-codes: E13 E24 E62 H24 J31 (search for similar items in EconPapers)
Pages: 31pages
Date: 2017-08
New Economics Papers: this item is included in nep-lma, nep-mac, nep-pbe and nep-pub
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