On the taxation of human and physical capital in models of endogenous growth

Abstract

This paper studies the effects of factor income taxation and of subsidies to human capital accumulation in models of endogenous growth. It examines in particular how these effects depend on the specification of the leisure activity and on the technology and tax treatment of the sector producing human capital. It shows that the negative effects of factor income taxes on economic growth are stronger when the human capital sector is a market good. Under these circumstances, a subsidy to human capital accumulation can offset the direct growth effects of labor taxation, making it akin to a consumption tax. The paper then briefly discusses the normative implications of the analysis for the optimal taxation of factor incomes.

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