Tax Progression and Human Capital in Imperfect Labour Markets

✍ Scribed by Clemens Fuest; Bernd Huber

• Book ID: 108561012
• Publisher: John Wiley and Sons
• Year: 2001
• Tongue: English
• Weight: 127 KB
• Volume: 2
• Category: Article
• ISSN: 1465-6485
• DOI: 10.1111/1468-0475.00024

✦ Synopsis

Abstract

Recent contributions to the theory of taxation argue that tax progression raises welfare and employment in the presence of labour market imperfections. This literature takes the endowment of workers with human capital as given. The present paper analyses the effects of tax progression in a model with endogenous human capital formation. We show that the effect of tax progression on human capital investment depends on the deductibility of the cost of human capital formation. With full deductibility, tax progression raises employment and welfare. With incomplete deductibility, in contrast, the effect of tax progression on employment and welfare may be negative.