Ruhr Economic Papers

Ruhr Economic Papers #12

Taxing Human Capital Efficiently - The Double Dividend of Taxing Nonqualified Labour More Heavily Than Qualified Labour

by Wolfram F. Richter

TU Dortmund, 05/2007, 30 S./p., 8 Euro, ISBN 978-3-86788-004-6



Assuming isoelastic returns to education and an endogenous supply of qualified and nonqualified labour, it is shown to be second-best efficient not to distort the choice of education. Furthermore, taxation should set incentives so that qualified labour is substituted for nonqualified labour. As a result, it is efficient to tax labour income regressively with respect to qualification and to tax the monetary cost of education at a level that restores efficiency in education. A tax on capital income alleviates the distortion that progressive taxation of labour income exerts on human-capital investment.

JEL-Classification: H21, I28, J24

Keywords: Endogenous choice of education and labour; efficient taxation of human and nonhuman capital; double-dividend hypothesis