Jacobs, B. and Bovenberg, A. (2011). Optimal taxation of human capital and the earnings function Journal of Public Economic Theory, 13(6):957--971.
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Affiliated author
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Publication year2011
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JournalJournal of Public Economic Theory
This paper explores how the specification of the earnings function impacts optimal nonlinear taxes on human capital under optimal nonlinear income taxation. If education is complementary to labor effort, education should be subsidized to offset tax distortions on labor supply. However, if education is complementary to ability, education should be taxed in order to redistribute income. If education is weakly separable from labor and ability in the earnings function, these two effects cancel and education should be neither taxed nor subsidized. {\textcopyright} 2011 Wiley Periodicals, Inc.