Human Capital and Optimal Positive Taxation of Capital Income

AL Bovenberg, Bas Jacobs

Research output: Contribution to journalArticleAcademicpeer-review

32 Citations (Scopus)
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Abstract

This paper analyzes optimal linear and non-linear taxes on capital and labor incomes in a life-cycle model of human capital investment, financial savings, and labor supply with heterogenous individuals. A dual income tax with a positive marginal tax rate on not only labor income but also capital income is optimal. The positive tax on capital income serves to alleviate the distortions of the labor tax on human capital accumulation. The optimal marginal tax rate on capital income is lower than that on labor income if savings are elastic compared to investment in human capital, substitution between verifiable and non-verifiable inputs in human capital formation is difficult, and most investments in human capital are verifiable so that education subsidies can directly reduce the tax wedge on learning. Numerical calculations suggest that the optimal marginal tax rate on capital income is substantial.
Original languageEnglish
Pages (from-to)451-478
Number of pages28
JournalInternational Tax and Public Finance
Volume17
Issue number5
DOIs
Publication statusPublished - 2010

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