ASSESSING THE DYNAMIC EFFICIENCY GAINS OF TAX-REFORM WHEN HUMAN-CAPITAL IS ENDOGENOUS

This paper develops a life-cycle growth model with endogenous human ca pital. accumulation and variable leisure, which is employed to simulat e dynamic equal-yield changes from an income tax to a consumption tax. Although endogenizing human capital investment decisions raises parti al-equilibrium estimates of the efficiency costs of capital income tax ation, general-equilibrium welfare impacts of unanticipated tax change s are little affected by the inclusion of endogenous human capital. Th is finding cannot be fully explained by the presence of general-equili brium adjustments in factor prices, and can be attributed in part to t he existence of transitional rigidities in capital stocks.