Tuesday, September 29, 2009

Fair labor income tax and human capital accumulation

The big problem with labor income taxation is that it discourages effort. What you would really want to do it tax luck (being born intelligent and rich) and encourage effort no matter your abilities (or even encourage it more if you are abler). There is a tax scheme that does the latter, the so-called ELIE taxes suggested by Serge-Christophe Kolm: taxing people on, say, IQ, is not distorting and brings more equality.

But removing the distortions on the labor supply may not be the only impact of ELIE taxes. There may also be an impact on the accumulation of physical and human capital. David de la Croix and Michel Lubrano build an overlapping generation model with people of heterogeneous skills and show that if markets are complete, ELIE taxes indeed reduce inequalities but reduce growth because less human capital is accumulated. The reason is that the taxes cannot solely be based on exogenous elements, and the endogenous parts is ties to education, which is then discouraged. Now prevent people from borrowing for education, and the growth penalty becomes less severe because the taxes redistribute resources towards those that are borrowing constrained. Of course, one can get education (and growth) back to the desired level by subsidizing education. Thus, tax the intelligent, but make education free, which is mostly used by the intelligent anyway.

1 comment:

david de la croix said...

Very good and attractive summary of what we did in this research.