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Income Taxation in a Life Cycle Model with Human Capital

Michael Keane ()

No 2012-W08, Economics Papers from Economics Group, Nuffield College, University of Oxford

Abstract: I examine the effect of labor income taxation in life-cycle models where work experience builds human capital. In this case, the wage no longer equals the opportunity cost of time – which is, instead, the wage plus returns to work experience. This has a number of interesting consequences. First, the data appear consistent with much larger labor supply elasticities than most prior work suggests. Second, again contrary to conventional wisdom, permanent tax changes can have larger effects on current labor supply than temporary tax changes. Third, human capital amplifies the labor supply response to permanent tax changes in the long-run, as a permanent tax reduces the rate of human capital accumulation (reducing worker productivity). Fourth, for plausible parameter values, welfare losses from proportional income taxation are likely to be much larger than conventional wisdom suggests.

Pages: 41 pages
Date: 2012-10-15
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pub
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Citations: View citations in EconPapers (6)

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http://www.nuffield.ox.ac.uk/economics/papers/2012/Taxes_HC_42_Nuffield.pdf (application/pdf)

Related works:
Working Paper: Income Taxation in a Life Cycle Model with Human Capital (2011) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:nuf:econwp:1208

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