International Tax and Public Finance

, Volume 17, Issue 5, pp 451–478

Human capital and optimal positive taxation of capital income

Open Access
Article

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 capital Labor income taxation Capital income taxation Life-cycle Education subsidies 

JEL Classification

H2 H5 I2 J2 

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Copyright information

© The Author(s) 2009

Authors and Affiliations

  1. 1.Erasmus School of Economics, Tinbergen Institute, Netspar and CESifoErasmus University RotterdamRotterdamThe Netherlands
  2. 2.Department of Economics, CentER, Netspar, CESifo and CEPRTilburg UniversityTilburgThe Netherlands

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