The Impact of Income Taxes on Labor's Productivity: A Human Capital Approach

Abstract

This paper explores the impact of several income tax policies on the acquisition of personal skills within the framework of a life-cycle model of human capital accumulation. The analysis considers the impact of taxes during both the early years of the life cycle when the individual allocates all time to learning and during the later years when the individual participates in the market. The paper demonstrates that an income tax can lower the market productivity of the labor force even when it is assumed that the individual allocates a fixed amount of time to the production of human capital and the market. Specifically, I demonstrate that a tax on earned income can lead to a flatter age-capital profile, and in addition, that the imposition of a tax will make the training process relatively more time intensive since the tax policy operates to lower the relative value of time.