This paper analyzes optimal linear taxes on capital and labor incomes in a life-cycle model of human capital investment, financial savings, and labor supply with heteroge- nous individuals. A dual income tax with a positive marginal tax rate on not only labor income but also capital income is optimal. The positive tax on capital income serves to alleviate the distortions of the labor tax on human capital accumulation. The optimal marginal tax rate on capital income is lower than that on labor income if savings are elastic compared to investment in human capital; substitution between inputs in human capital formation is difficult; and most investments in human capital are verifiable. Numerical calculations suggest that the optimal marginal tax rate on capital income is close to the tax rate on labor income.

capital income taxation, education subsidies, human capital, labor income taxation, life cycle
Taxation, Subsidies, and Revenue (jel H2), National Government Expenditures and Related Policies (jel H5), Health Production: Nutrition, Mortality, Morbidity, Substance Abuse and Addiction, Disability, and Economic Behavior (jel I12), Time Allocation, Work Behavior, and Employment Determination and Creation; Human Capital (jel J2)
Tinbergen Institute Discussion Paper Series
Tinbergen Institute

Jacobs, B, & Bovenberg, A.L. (2005). Human Capital and Optimal Positive Taxation of Capital Income (No. TI 05-035/3). Tinbergen Institute Discussion Paper Series. Retrieved from