Labor income taxation and human capital accumulation

Abstract

This paper provides alternative analytical results concerning the effect of labor income taxation on human capital accumulation. With the tax revenues being consumed by the government and savings being negatively related to the labor tax rate, an increase in the labor income tax rate reduces the incentive for human capital accumulation, and thus, decreases human capital. With tax revenues being consumed by government and savings being positively related to the labor tax rate, an increase in the tax rate increases the incentive for human capital accumulation and increases human capital. With the tax revenues being used to compensate the individuals who pay the taxes, an increase in the tax rate has no effect on human capital.