Optimal income taxation with human capital accumulation and limited record keeping |
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Authors: | Marek Kapicka |
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Institution: | aDepartment of Economics, University of California, 3052 North Hall, Santa Barbara, CA 93106, USA |
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Abstract: | This paper characterizes optimal income taxes in a dynamic economy where human capital is unobservable and the government is restricted to use taxes that depend only on current income. I show that unobservability of human capital tends to decrease the labor wedge, while the effect on the human capital wedge is uncertain. I also analyze the relationship between optimal taxes in economies with and without endogenous human capital and identify two qualitative reasons why the optimal tax codes will differ. I perform numerical simulations to calculate the quantitative relevance of endogenous human capital formation for optimal tax policy. I find that endogenous human capital lowers marginal tax rates by about 9% on average, as compared with a static model without human capital. |
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Keywords: | Optimal taxation Income taxation Human capital |
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