Research

Estimates of Marginal Welfare Costs of Taxation with Investment in Human and Physical Capital

Co-Authored by: Snow, Arthur

We develop a perfect foresight, overlapping generations model with intragenerational inequality and endogenous human and physical capital investment, and we calculate welfare costs for marginal reforms of taxation and public spending. Welfare costs are uniformly lower than in the equivalent static model where human and physical capital are fixed. Most of the upward bias in static estimates arises from fixed human capital because welfare cost is predominantly tax leakage from lower effective labor supply, but reallocating time between education and labor can leave effective labor supply unchanged. Hence, adjustments in human capital have an important mitigating influence on marginal welfare costs.

Publication Information
Article Title: Estimates of Marginal Welfare Costs of Taxation with Investment in Human and Physical Capital
Journal: Economic Inquiry (Jul, 2006)
v. 44 iss. 4 pp. 451-464
Author(s): Allgood, Sam
Researcher Information
    
Allgood, Sam
Allgood, Sam
Edwin J. Faulkner Professor of Economics
Expertise:
  • Economic Education
  • Labor Economics (wages, employment, working conditions, unions)
  • Microeconomics
Economics
CoB 525 V
P.O. Box 880489
University of Nebraska-Lincoln
Lincoln, NE 68588-0489, USA
Phone: (402) 472-3367
Fax: (402) 472-9700
sallgood1@unl.edu