Working Paper: NBER ID: w0698
Authors: E. John Driffill; Harvey S. Rosen
Abstract: A lifetime perspective is appropriate in assessing the welfare implications of government tax policies. Although a number of attempts have been made to ex- amine the excess burden of taxation in life-cycle models, these have tended to ignore the role of human capital accumulation and/or the leisure-income choice. In this paper, we do numerical simulations with a model that takes both of these phenomena into account. We find that under reasonable assumptions, the failure to take into account distortions of human capital decisions produces substantial underestimates of the excess burden of income taxation. In addition, allowing for the endogeneity of human capital increases the efficiency of a personal consumption tax relative to that of an equal yield income tax.
Keywords: Taxation; Excess Burden; Human Capital; Lifecycle Perspective
JEL Codes: H21; H24; J24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Omission of human capital accumulation from taxation models (O41) | Significant underestimations of the excess burden of income taxation (H31) |
| Endogeneity of human capital (J24) | Increases the efficiency of taxation (H21) |
| When human capital is considered (J24) | Lifetime excess burden of an income tax increases with the tax rate (H31) |
| Human capital accumulation fixed (J24) | Excess burden to tax revenue ratio diminishes substantially (H22) |
| Elasticity of lifetime human capital with respect to the tax rate (H31) | About 0.09 (C29) |