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Taxing Human Capital: A Good Idea

Christoph Braun

No 202, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: This paper studies a Ramsey optimal taxation model with human capital in an infinite-horizon setting. Contrary to Jones, Manuelli, and Rossi (1997), the human capital production function does not include the current stock of human capital as a production factor. As a result, the return to human capital, namely labor income, does not vanish in equilibrium. In a stationary state, the household underinvests in human capital relative to the first best, i.e., education is distorted. Human capital is effectively taxed. The optimal tax scheme prescribes making the cost of education not fully tax-deductible.

Keywords: optimal taxation; human capital; Ramsey approach (search for similar items in EconPapers)
JEL-codes: H21 I28 J24 (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:202

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