Optimal Taxation and Human Capital Policies over the Life Cycle

Stefanie Stantcheva

NBER Working Paper No. 21207
Issued in May 2015
NBER Program(s):Economics of Education, Public Economics

This paper derives optimal income tax and human capital policies in a dynamic life cycle model of labor supply and risky human capital formation. The wage is a function of both stochastic, persistent, and exogenous "ability'' and endogenous human capital. Human capital is acquired throughout life through monetary expenses. The government faces asymmetric information regarding the initial ability of agents and the lifetime evolution of ability, as well as the labor supply. The optimal subsidy on human capital expenses is determined by three considerations: counterbalancing distortions to human capital investment from the taxation of wage and capital income, encouraging labor supply, and providing insurance against adverse draws from the productivity distribution. When the wage elasticity with respect to ability is increasing in human capital, the optimal subsidy involves less than full deductibility of human capital expenses on the tax base, and falls with age. I consider two ways to implement the optimum: income contingent loans, and a tax scheme that allows for a deferred deductibility of human capital expenses. Numerical results are presented that suggest that full dynamic risk-adjusted deductibility of expenses might be close to optimal, and that simple linear age-dependent policies can achieve most of the welfare gain from the second best.

download in pdf format
   (724 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w21207

Published: Stefanie Stantcheva, 2017. "Optimal Taxation and Human Capital Policies over the Life Cycle," Journal of Political Economy, vol 125(6), pages 1931-1990.

Users who downloaded this paper also downloaded* these:
Stantcheva w21381 Learning and (or) Doing: Human Capital Investments and Optimal Taxation
Stantcheva w21177 Optimal Income, Education, and Bequest Taxes in an Intergenerational Model
Feldstein w5055 Tax Avoidance and the Deadweight Loss of the Income Tax
Taylor w21039 Credit, Financial Stability, and the Macroeconomy
Golosov, Tsyvinski, and Werning New Dynamic Public Finance: A User's Guide
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us