Taxing Human Capital Efficiently: The Double Dividend of Taxing Non-Qualified Labour More Heavily than Qualified Labour

26 Pages Posted: 15 Oct 2006

See all articles by Wolfram F. Richter

Wolfram F. Richter

TU Dortmund University; CESifo (Center for Economic Studies and Ifo Institute); Institute for the Study of Labor (IZA)

Date Written: October 2006

Abstract

Assuming decreasing returns to education and the endogenous supply of qualified and non-qualified labour it is shown to be efficient to supplement a consumption tax with positive incentives for education. If the return from education is isoelastic and if the choice is between (i) subsidizing the monetary cost of education and (ii) taxing non-qualified labour income more heavily than qualified labour income while keeping the effective cost of education constant, the latter policy is shown to be second-best efficient. In particular, any tax distortions should be constrained to labour choices while the choice of education should remain undistorted. The result holds for arbitrary utility functions.

Keywords: endogenous choice of labour and education, efficient taxation, human capital investment, double dividend hypothesis

JEL Classification: H2, I2, J24

Suggested Citation

Richter, Wolfram F., Taxing Human Capital Efficiently: The Double Dividend of Taxing Non-Qualified Labour More Heavily than Qualified Labour (October 2006). IZA Discussion Paper No. 2328, CESifo Working Paper Series No. 1832, Ruhr Economic Paper No. 12, Available at SSRN: https://ssrn.com/abstract=937343 or http://dx.doi.org/10.2139/ssrn.937343

Wolfram F. Richter (Contact Author)

TU Dortmund University ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Institute for the Study of Labor (IZA)

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Germany

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