OPTIMAL TAXATION IN BEN-PORATH MODEL

Abstract

This paper is about Ben-Porath model of human capital investments and non-trivial labor supply decisions throughout the lifetime of the individual. In Ben-Porath model without taxation: The time allocation condition ensures optimal trade-offs between leisure, work, and investment in human capital. Shadow price of human capital is increasing over time. In Ben-Porath-Huggett model Mirrlees taxation is the best option when skill is private knowledge, Ramsey taxation requires subsidies to prevent human capital stagnation. Pareto taxation is the second-best solution when redistribution is a goal. Ramsey taxation yields highest government revenues, Mirrlees and Pareto taxes yield highest utility.