Age-dependent taxes with endogenous human capital formation

By Carlos da Costa and Marcelo Santos

http://d.repec.org/n?u=RePEc:red:sed015:824&r=dge

We calculate optimal age-dependent labor income taxes in an environment for which the age efficiency profile is endogenously determined by human capital investment. Heterogeneous individuals are exposed to idiosyncratic shocks to their human capital investments, a key element, along with the endogeneity of human capital itself in the determination of optimal age-dependent taxes. Our results highlight the complementary role of capital income taxation when human capital is endogenous. The nature of human capital accumulation is quantitatively relevant for determining the age dependence of income taxes. We assess the cost of ignoring the endogenous nature of age-efficiency profiles.

There is a growing literature on age-dependent taxation that was initially not taken too seriously. But there are really good reasons to look at it, in particular because not all generations have have been treated equally by economic events and policies in the past. And there are also life-cycle effects that matter a lot. Also, age-dependent taxation can help overcome issues with the financing of retirement pensions. This paper adds to the literature by showing that human capital accumulation considerations are important.

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