Optimal Taxation with Risky Human Capital

Abstract

We study optimal tax policies in a life-cycle economy with permanent ability differences and risky human capital investments that have both an unobservable component, learning effort, and an observable component, schooling. The optimal policies balance redistribution across agents, insurance against human capital shocks, and incentives to learn and work. In the optimum, (i ) high-ability agents face risky consumption while low-ability agents are insured; (ii ) the optimal schooling subsidy is substantial but less than 100 percent; (iii) if utility is separable in labor and learning effort, the inverse labor wedge follows a random walk; and (iv ) if the utility is not separable then the “no distortion at the top” result does not apply. The welfare gains from switching to the optimal tax system are about 1 percent in annual consumption equivalents. (JEL D15, H21, H24, I26, J24)

Estate Taxation and Human Capital With Information Externalities

“…In particular, Farhi and Werning (2010) and Piketty and Saez (2013) show the optimality of inheritance taxes in models with altruistic bequests and inequality. Furthermore, Pestieau and Sato (2008), Kapicka and Neira (2013), and Krueger and Ludwig (2016) assess how skill formation and education alter the effects of taxation. My paper contributes to the taxation literature by adding human capital spillovers through an information externality and showing significant quantitative positive effects of estate taxes on welfare, wages, and output.…”

The Optimal Taxation of Business Owners

“…Stantcheva (2017) considers an extension of this framework in which wages depend on both exogenous ability and the stock of human capital, but there is no moral hazard and no agent employs workers or trades shares in his business. Closer to the current paper are Albanesi (2006), Kapička and Neira (2019) and Best and Kleven (2012), who conduct optimal taxation exercises in two-period economies with hidden effort, and Makris and Pavan (2021), who conduct a similar analysis in an environment with learning-by-doing. However, these papers do not derive implications of their framework for long-run distributions of consumption or income, and because their twoperiod nature, 2 they cannot address how the risk borne by any agent depends on his history of productivity shocks.…”

Opportunity and Inequality Across Generations

“…The special issue on human capital and inequality edited by Corbae et al (2017) and the volume on inequality and redistribution of the Carnegie-Rochester-Conference (2016) provide a good overview over recent research. Optimal taxation of human capital using a Mirrleesian approach has been analyzed by Findeisen and Sachs (2016), Kapička (2015), Kapička and Neira (2019), Stantcheva (2015) and Stantcheva (2017), and Koeniger and Prat (2018). Heathcote et al (2017), Krueger and Ludwig (2016), Lee and Seshadri (2019) and Peterman (2016) are examples for analyses based on a Ramsey approach to optimal taxation.…”