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Taxation, Human Capital Investment and Economic Growth

Author: LinJingBo
Tutor: ZhangLiFeng
School: Zhejiang University of Finance
Course: Western Economics
Keywords: tax human capital investment and accumulation economic growth numerical simulation
CLC: F249.2;F124;F224
Type: Master's thesis
Year: 2012
Downloads: 125
Quote: 0
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Abstract


In the 21 st age of knowledge-based economy, the competition for economic strength and national power of countries all around the world is a basic competition for human capital and human quality. It is well-known that human capital means a lot to a country’s future development, in other words, human capital is going to be such an economic power more important than material capital that the problem concerning human capital’s investment and accumulation has already be valued by countries around the world. However, the China Human Capital Report 2010 revealed that although the total China human capital is large, the per-capital human capital is much lower than other countries’per-capital level like only one-sixth of American and one-fourth of Canada,which means that China still has a long way to go to be a human capital power.The key to how to make China a human capital power is to make a breakthrough with the basic rule about how human capital is formed. Theodore Schultz once pointed out education plays an important role in the production process of human capital, and other researchers showed that government and private are the main principles to invest in education, which naturally reminds us that by increasing the government expenditure on education and private investment expenditure on education the investment and accumulation of human capital can be effectively improved. Closely related with both the government expenditure on education and private investment expenditure on education is the government taxation, which on one hand via financing the government public expenditure on education plays positive role in the investment and accumulation of human capital and economic growth; on the other hand it also influences another human capital investment principle---private’s investment decision. But it’s worth noting that different way of taxation can form different stimulation for private’s decision of investing in human capital, for example, raising capital income tax rate is good for the investment and accumulation of human capital while raising labor income tax rate is just the opposite. Then, besides the government taxation’s influence on private’s human capital investment decision, whether private’s human capital investment decision is affected by the government public expenditure on education or not. So it is necessary to comprehensively consider all influential aspects when conducting the work of studying the relationship among taxation, human capital investment and accumulation, and the economic growth. Based the above understanding, this paper is aim to solve the following three questions: first, under the condition of government public expenditure on education is given, how is the private investment expenditure on education going to change when the tax rates is changing ? Whether the tax rate’s changing is good for human capital’s accumulation and economic growth? Second, besides the influence caused by the tax rate’s changing, whether the private human capital investment decision is affected by the government public expenditure on education or not? How much is the decision affected? And the ultimate influence caused by changing government expenditure on education whether can promote human capital accumulation and economic growth? Lastly, if the changing government public expenditure on education does affect the private education investment decision, compared to the effect by changing the tax rate has on human capital investment and accumulation, which is greater? Which one plays the dominant role? And how is the macro-economy performing? Make sure about these questions is crucial and valuable to help government make the proper fiscal policy to promote China human capital investment and accumulation.Consequently, this paper theoretically builds a two-sector economy model with a human capital production function including both the government public expenditure and private investment expenditure on education. By exploring the equilibrium growth path and characteristics of the stable economy, and simultaneously with the sample data according to China economy in past dozen years, the paper then conducts a calibration for parameters in the model and further makes a numerical simulation analysis to find out the influencing mechanism how the tax rate’s changing affects human capital investment and accumulation and the economic growth. Finally, we get the following results: first, raising capital income tax rate benefits human capital’s investment and accumulation, but is harmful for economic growth. Second, increase in labor income tax is unfavorable to the investment and accumulation of human capital and the economic growth. Third, government public expenditure on education has crowding-out effect on private education investment expenditure, but expanding the scale of government public expenditure on education improves human capital investment and the economic growth. Finally, when government finances the expanding government public expenditure on education by raising the rates of capital income tax and labor income tax, tax plays a positive role in the process of human capital investment and accumulation, and the ultimate effect on economic growth is favorable too.This paper has two main innovative points: first, build a two-sector economy model with a human capital production function including both the government public expenditure and private investment expenditure on education when conducting the theoretical research to find the equilibrium growth path and characteristics of the stable economy. Second, there are various studies concerning the relationship between tax and economic growth, but this paper study the relationship through such a transmission mechanism that to change the tax rate to affect human capital investment and accumulation to have ultimate effects on macro-economy. Therefore, this paper will make up for the pity that domestic researches are short of theoretical support when studying the relationship among tax, human capital investment and accumulation and the economic growth.

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