AGE†DEPENDENT TAXES WITH ENDOGENOUS HUMAN CAPITAL FORMATION

Abstract

We assess the gains attained by the introduction of age-dependent labor income taxes in an overlapping generations economy where individuals live ameaningful life cycle and endogenously accumulate human capital. The model is sufficiently rich to isolate the role of general equilibrium effects, credit market imperfections, and different forms of human capital accumulation. The large welfare gains we obtain cannot be attained without age dependence, nor can they be attained with age-dependent taxes if progressivity of labor income taxes and capital income tax rates are not suitably adjusted to profit from the complementarity of these instruments.