SFB 303 Discussion Paper No. A - 322
Author: Nerlove, Marc, Assaf Razin, Efraim Sadka, and Robert K. von Weizsäcker
Title: Tax Policy, Investments in Human and Physical Capital, and Productivity
Abstract: In a world with only unskilled labour and physical capital, a comprehensive income tax generates two
distortionary effects on resource allocations. It distorts the intratemporal leisure-consumption tradeoffs and the
intertemporal saving-consumption tradeoffs. In this paper we analyze the effects of these distortions on overall
savings, the composition of savings between investments and human capital and physical capital, and the pattern
of economic growth. Section II deals with the asymmetric treatment of human and physical capital by the
income tax. Section III develops a stylized overlapping generations model which is used for analyzing the long-
run effects of income taxation on investments in human and physical capital. Section IV extends the analysis to
include a productivity effect, external to the individual, associated with investments in human capital. Section V
provides some concluding remarks.
Creation-Date: October 1990
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