Template-type: ReDIF-Paper 1.0
Author-Name: Michael P. Keane
Author-Email: michael.keane@nuffield.ox.ac.uk
Author-Workplace-Name: Nuffield College, University of Oxford
Title: Income Taxation in a Life Cycle Model with Human Capital
Abstract: I examine the effect of labor income taxation in life-cycle models where work experience builds 
human capital. In this case, the wage no longer equals the opportunity cost of time – which is, instead, 
the wage plus returns to work experience. This has a number of interesting consequences. First, the data 
appear consistent with much larger labor supply elasticities than most prior work suggests. Second, again 
contrary to conventional wisdom, permanent tax changes can have larger effects on current labor supply 
than temporary tax changes. Third, human capital amplifies the labor supply response to permanent tax 
changes in the long-run, as a permanent tax reduces the rate of human capital accumulation (reducing worker 
productivity). Fourth, for plausible parameter values, welfare losses from proportional income taxation are 
likely to be much larger than conventional wisdom suggests.
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X-Classification-JEL: 
Length: 41 pages
Creation-Date: 2012-10-15
Number: 2012-W08
File-URL: http://www.nuffield.ox.ac.uk/economics/papers/2012/Taxes_HC_42_Nuffield.pdf
File-Format: application/pdf
Handle: RePEc:nuf:econwp:1208