Abstract
Recent estimates of the effects of tax reforms in the presence of human capital differ greatly. This paper examines which model features and parameter values are critical for the conclusions about the effects of tax changes. I find that the conflicting results of the previous literature are in large part due to implicit assumptions about intergenerational links that differ between life-cycle and infinite horizon models. A model that explicitly incorporates intergenerational links in human and physical capital reveals that neither conventional life-cycle models, which abstract from all intergenerational links, nor infinite horizon models, in which both types of capital are heritable, correctly predict the long-run and transitional effects of tax changes.
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