Optimal Taxation of Human Capital and the Earnings Function


  • Bas Jacobs, Erasmus School of Economics, Erasmus University Rotterdam, Tinbergen Institute, Netspar and CESifo, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands (bjacobs@ese.eur.nl), URL: http://www.people.few.eur.nl/bjacobs. A. Lans Bovenberg, Tilburg University, CentER, Netspar, CESifo and CEPR, The Netherlands (a.l.bovenberg@uvt.nl).

  •  Bas Jacobs gratefully acknowledges financial support from the Dutch Organization for Sciences (NWO Vidi Grant No. 452-07-013, “Skill Formation in Distorted Labor Markets”). Part of this research has been done while Jacobs was visiting scholar at the Center of Economic Studies of the Ludwig-Maximillians-Universität München. Comments and suggestions by seminar participants at the University of Konstanz and the 64th IIPF conference, August 22–25, 2008, Maastricht, the Netherlands, are gratefully acknowledged. We are grateful to two anonymous referees, who provided very useful comments and suggestions for improvement. The usual disclaimer applies.


This paper explores how the specification of the earnings function impacts optimal nonlinear taxes on human capital under optimal nonlinear income taxation. If education is complementary to labor effort, education should be subsidized to offset tax distortions on labor supply. However, if education is complementary to ability, education should be taxed in order to redistribute income. If education is weakly separable from labor and ability in the earnings function, these two effects cancel and education should be neither taxed nor subsidized.