Tax Program With Capital-Skill Complementarity

• Main Authors: Hsin-Jung Yu, 俞欣榮
• Other Authors: Chien-Cheng Yang
• Format: Others
• Language: en_US
• Published: 2015
• Online Access: http://ndltd.ncl.edu.tw/handle/94915757416887911032

博士 === 國立臺灣大學 === 經濟學研究所 === 103 === The post-war period has witnessed a secular decline in the relative price of capital equipment and an increase in the equipment to GDP ratio. With capital-skill complementarity, more capital equipment will raise the demand for skilled worker and thus the skill premium, which increases the disparities of economic well-being between skilled and unskilled workers. How should a government set taxes on capital versus labor dynamically in face of the rising inequality across workers? Employing an empirically plausible capital-skill complementarity form of production functions as suggested by Krusell et al. (2000), this paper attempts to answer the question by means of the Mirrlees approach. In particular, the government cannot distinguish between skilled and unskilled workers due to information frictions and needs to design a tax program such that workers will truthfully reveal their types. Under the utilitarian and separable utility function, if the skill premium is larger than one, then only the skilled workers have the incentive to mimic the unskilled workers. A higher skill premium allows the skilled workers to have more leisure time when pretending to be unskilled workers and makes the incentive problem more difficult to deal with. Therefore, the government imposes respectively positive, negative and positive tax rates for capital equipment, skilled and unskilled workers to reduce the wage premium and help resolve the incentive problem. Following the secular decline in the relative price of capital equipment, the efficiency loss from taxing capital equipment rises, and the equilibrium tax rates for capital equipment fall while the equilibrium tax rates for both types of workers rise. Over the whole transitional dynamics, the tax rates for capital equipment, skilled and unskilled workers however remain positive, negative and positive, which indicates the concern for incentive problem dominates the concern for efficiency losses. Finally, relative to the current U.S. fiscal policy, the output level will be higher and the consumption inequality will be lower under our Mirrleesian tax program.