Second-Best Income Taxation with Endogenous Human Capital and Borrowing Constraints

Arbeitspapier

We formulate a two-period life-cycle model of saving, labor supply, and human capital investments when individuals differ in ability and initial wealth. Borrowing constraints prevent individuals to optimally smooth consumption over the life-cycle and to optimally invest in human capital. We show that the optimal linear income tax is positive - even in the absence of any redistributional concerns. A progressive income tax is efficient because it relaxes borrowing constraints by redistributing resources from the unconstrained to the borrowing constrained stages of the life-cycle. Hence, consumption is smoothed better and investments in human capital increase. The progressive income tax is a second-best instrument to correct the non-tax distortion in the capital market. The equity-efficiency trade-off is therefore less severe when progressive income taxes mitigate capital market imperfections. Simulations demonstrate that optimal income taxes are substantially higher when they alleviate credit constraints.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: CESifo Working Paper ; No. 4155

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Taxation and Subsidies: Efficiency; Optimal Taxation ; Education and Research Institutions: General ; Demand and Supply of Labor: General
• Thema: labor taxation ; human capital investment ; credit constraints

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Jacobs, Bas ; Yang, Hongyan
• Ereignis: Veröffentlichung
• (wer): Center for Economic Studies and ifo Institute (CESifo)
• (wo): Munich
• (wann): 2013

Weitere Informationen

• Handle: http://hdl.handle.net/10419/71176
• Letzte Aktualisierung: 20.09.2024, 08:21 MESZ