Working Paper: CEPR ID: DP5047
Authors: Bas Jacobs; A. Lans Bovenberg
Abstract: This paper analyzes optimal linear taxes on capital and labour incomes in a life-cycle model of human capital investment, financial savings, and labour supply with heterogenous individuals. A dual income tax with a positive marginal tax rate on not only labour income but also capital income is optimal. The positive tax on capital income serves to alleviate the distortions of the labour tax on human capital accumulation. The optimal marginal tax rate on capital income is lower than that on labour income if savings are elastic compared to investment in human capital; substitution between inputs in human capital formation is difficult; and most investments in human capital are verifiable. Numerical calculations suggest that the optimal marginal tax rate on capital income is close to the tax rate on labour income.
Keywords: Capital Income Taxation; Education Subsidies; Human Capital; Labour Income Taxation; Life Cycle
JEL Codes: H2; H5; I2; J2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Optimal capital income taxes (H21) | mitigate the distortions caused by labor taxes on human capital investments (H31) |
| Positive tax on capital income (H24) | alleviates the negative impact of labor income taxation on human capital accumulation (H31) |
| Optimal marginal tax rate on capital income (H21) | lower than that on labor income when savings are elastic relative to human capital investment (H31) |
| Positive taxation of capital income (H24) | optimal even when preferences are separable and markets are complete (D52) |
| Higher capital income taxes (F38) | improved human capital investments (J24) |