CAPITAL ACCUMULATION AND TAXATION IN A GENERAL EQUILIBRIUM-MODEL WITHRISKY HUMAN-CAPITAL

We integrate life cycle precautionary saving and human capital investm ent by modeling both activities in a single general equilibrium settin g. Allowing human capital investment to respond to earnings uncertaint y significantly increases precautionary saving but not enough for simu lated saving rates to reach historical levels in the U.S. In contrast to recent deterministic analyses, we show income taxation may actually stimulate human capital due to the insurance effect of. taxing uncert ain returns. The same insurance effect helps explain why conversion to a wage tax base may lead to reduced savings, in contrast to some rece nt claims.