Working Paper: CEPR ID: DP1477
Authors: Gian Maria Milesi-Ferretti; Nouriel Roubini
Abstract: This paper studies the effects of factor income taxation and of subsidies to human capital accumulation in models of endogenous growth. It examines in particular how these effects depend on the specification of the leisure activity and on the technology and tax treatment of the sector producing human capital. It shows that the negative effects of factor income taxes on economic growth are stronger when the human capital sector is a market good. Under these circumstances, a subsidy to human capital accumulation can offset the direct growth effects of labour taxation, making it akin to a consumption tax. The paper then derives the normative implications of the analysis for the optimal taxation of factor incomes, showing that all tax and subsidy ?wedges? should be eliminated in the long run.
Keywords: taxation; endogenous growth; human capital; leisure
JEL Codes: E62; F41; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| factor income taxes (E25) | economic growth (O49) |
| labor income taxes (J39) | human capital accumulation (J24) |
| human capital accumulation (J24) | economic growth (O49) |
| subsidies to human capital investment (J24) | labor taxation effects (H31) |
| human capital treated as market good (J24) | factor income taxes impact on growth (F62) |
| human capital treated as nonmarket good (J24) | labor income taxation distortions (H31) |