Taxation of Earnings: the impact on labor supply and human capital
Can the tax system be reformed to generate the levels of revenue required to fund public goods while reducing the overall level of distortions implicit in the system? This question lies at the heart of many economic analyses of tax reform including the Mirrlees Review. Motivated by the aim to develop a broad set of principles for what makes a 'good tax system' the Review was an attempt to build a case for tax reform from the large body of economic theory and empirical evidence. The discussion in this paper draws on the work in the Review and concerns the taxation of labour earnings as well as relevant aspects of the welfare benefit and tax credit systems. It focuses on the empirical foundations for tax reform and argues for placing the analysis of earnings taxation in a lifetime setting, recognising the importance of human capital investments.