Hostname: page-component-5d59c44645-dknvm Total loading time: 0 Render date: 2024-03-02T07:52:51.944Z Has data issue: false hasContentIssue false


Published online by Cambridge University Press:  10 June 2004

Iowa State University


How do taxes affect human capital accumulation? This question has been studied extensively in the context of two model classes: overlapping generations (OLG) and infinite horizon (IH). These embody very different assumptions about the intergenerational transmission of physical and human capital. This paper investigates how such differences in intercohort persistence affect the responsiveness of human capital to taxation. A model is developed that nests OLG and IH models as special cases. The steady-state and transitional effects of tax changes are computed for varying degrees of persistence. The main finding is that stronger intercohort persistence magnifies the impact of taxation on human capital and leads to slower transitional dynamics. As a result, IH models generate systematically larger tax effects than OLG models. For the tax experiments studied here, models with complete persistence generate steady-state tax elasticities at least two times larger and transitional half-lives at least three times longer than do models without persistence.

© 2004 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)


Auerbach A. & L. Kotlikoff 1987 Dynamic Fiscal Policy. Cambridge, MA: Cambridge University Press.
Becker G.S. & N. Tomes 1986 Human capital and the rise and fall of families. Journal of Labor Economics 4, S1S39.Google Scholar
Davies J. & J. Whalley 1991 Taxes and capital formation: How important is human capital? In D. Bernheim & J. Shoven (eds.), National Saving and Economic Performance, pp. 163197. Chicago: University of Chicago Press.
Duncan G.J. & S. Hoffman 1979 On-the-job training and earnings differences by race and sex. Review of Economics and Statistics 61, 594603.Google Scholar
Engen E.M., J. Gravelle & K. Smetters 1997 Dynamic tax models: Why they do the things they do. National Tax Journal 50, 657682.Google Scholar
Fernandez R. & R. Rogerson 1996 Income distribution, communities, and the quality of public education. Quarterly Journal of Economics 111, 135164.Google Scholar
Hendricks L. 1999 Taxation and long-run growth. Journal of Monetary Economics 43, 411434.Google Scholar
Hendricks L. 2000 Taxation and Human Capital Accumulation with Intergenerational Persistence. Mimeo, Iowa State University.
Hendricks L. 2001 Growth, death, and taxes. Review of Economic Dynamics 4, 2657.Google Scholar
Jovanovic B. & Y. Nyarko 1995 The transfer of human capital. Journal of Economic Dynamics and Control 19, 10331064.Google Scholar
Killingsworth M. 1983 Labor Supply. Cambridge, UK: Cambridge University Press.
Lucas R.E. 1990 Supply-side economics: An analytical review. Oxford Economic Papers 42, 293316.Google Scholar
Mankiw N.G. 1995 The growth of nations. Brookings Papers on Economic Activity 1, 275326.Google Scholar
Mankiw N.G., D. Romer & D.N. Weil 1992 A contribution to the empirics of economic growth. Quarterly Journal of Economics 107, 407437.Google Scholar
Mincer J. 1993 Studies in Human Capital. Cambridge, UK: Cambridge University Press.
Mulligan C.B. 1997 Parental Priorities. Chicago: University of Chicago Press.
Mulligan C.B. 1999 Galton versus the human capital approach to inheritance. Journal of Political Economy 107, S184S224.Google Scholar
Prescott E.C. 1998 Needed: A theory of total factor productivity. International Economic Review 39, 525552.Google Scholar
Stokey N.L. & S. Rebelo 1995 Growth effects of flat-rate taxes. Journal of Political Economy 103, 519550.Google Scholar
Trostel P.A. 1993 The effect of taxation on human capital. Journal of Political Economy 101, 327350.Google Scholar