Back to Brent Kreider's research

Optimal Wage Taxation when the Choice to Work Depends on Accumulated Human Capital

Economic Inquiry (EI), 46(4), October 2008, 660-675

Brent Kreider, Iowa State University

This paper studies how optimal wage tax conclusions from the classic two-period life-cycle model of human capital
accumulation are affected by endogenizing the number of taxpaying workers.  In the absence of a corrective policy,
young individuals underinvest in human capital from a social perspective because tax premiums for transfers to nonworkers
are not actuarially adjusted downward for human capital attainment.  Compensated wage taxes and subsidies can restore
proper price signals.  Numerical simulations suggest that even modest extensive margin employment elasticities can be
sufficient to substantially impact the magnitudes and even the signs of optimal wage tax rates.