Tax Reform and Human Capital Accumulation: Evidence from an Empirical General Equilibrium Model of Skill Formation

Christopher Taber

IPR working papers from Institute for Policy Resarch at Northwestern University

Abstract: This paper adapts the heterogeneous agent dynamic general equilibrium model of labor earnings developed by Heckman, Lochner, and Taber (1998a) to estimate the effect of tax reform on human capital accumulation. The model allows for both schooling and on-the-job training. I estimate it on micro data accounting for changes in the wage structure and changes in the tax system over time. The estimates are then used to examine two effects of the tax system: (1) the extent to which the progressivity of the tax system distorts human capital, and (2) the extent to which taxation of physical capital favors human capital investment. I find that the long run effects of both distortions on both types of investment are small. There is a larger short run effect on schooling, but it is short lived.

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Persistent link: https://EconPapers.repec.org/RePEc:wop:nwuipr:98-28

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