International Tax and Public Finance

, Volume 17, Issue 5, pp 451–478

Human capital and optimal positive taxation of capital income

Authors

    • Erasmus School of Economics, Tinbergen Institute, Netspar and CESifoErasmus University Rotterdam
  • A. Lans Bovenberg
    • Department of Economics, CentER, Netspar, CESifo and CEPRTilburg University
Open AccessArticle

DOI: 10.1007/s10797-009-9120-5

Cite this article as:
Jacobs, B. & Bovenberg, A.L. Int Tax Public Finance (2010) 17: 451. doi:10.1007/s10797-009-9120-5

Abstract

This paper analyzes optimal linear and non-linear taxes on capital and labor incomes in a life-cycle model of human capital investment, financial savings, and labor supply with heterogenous individuals. A dual income tax with a positive marginal tax rate on not only labor income but also capital income is optimal. The positive tax on capital income serves to alleviate the distortions of the labor tax on human capital accumulation. The optimal marginal tax rate on capital income is lower than that on labor income if savings are elastic compared to investment in human capital, substitution between verifiable and non-verifiable inputs in human capital formation is difficult, and most investments in human capital are verifiable so that education subsidies can directly reduce the tax wedge on learning. Numerical calculations suggest that the optimal marginal tax rate on capital income is substantial.

Keywords

Human capitalLabor income taxationCapital income taxationLife-cycleEducation subsidies

JEL Classification

H2H5I2J2
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Copyright information

© The Author(s) 2009