Working Paper: NBER ID: w4882
Authors: Nouriel Roubini; Gian Maria Milesi-Ferretti
Abstract: This paper studies the effects of human and physical capital income taxation on growth, and examines how these effects depend on the technologies for human capital accumulation and 'leisure'. It then derives the normative implications of the analysis for the optimal taxation of factor incomes. It is shown that in general both capital and labor (human capital) taxes are growth-reducing. In these cases, the optimal long-run tax on both capital and labor income is zero. The optimal taxation plan consists of taxing both factors in the short run, and financing spending in the long run through accumulated budget surpluses.
Keywords: Optimal Taxation; Human Capital; Physical Capital; Endogenous Growth
JEL Codes: H21; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher tax rates on capital income (F38) | reduced economic growth (F69) |
| capital human capital taxes (H24) | reduced economic growth (F69) |
| labor human capital taxes (J24) | reduced economic growth (F69) |
| optimal long-run tax on both capital and labor income (H21) | zero (Y70) |
| optimal taxation plan requires taxing both factors (H21) | finance government spending in the long run (E62) |
| human capital accumulation (J24) | modifies traditional results about taxation of labor and capital (H31) |
| optimal taxation of both capital and labor income (H21) | could be zero in the long run (G00) |