Reforming the Taxation of Human Capital: A Modest Proposal for Promoting Economic Growth

This paper proposes a new scheme of personal income taxation that would eliminate inefficiencies arising from differences in the tax treatment of investments in intangible human capital and other types of capital formation. It also would offset the exacerbation of those distortions due to progressive income taxation, without requiring the latter’s abandonment. The tax regime proposed here would permit full deductibility of private costs of education and training, but defer the exercise of the deduction credits. A novel instrument for achieving these objectives is an individually held, non-transferable asset: an untaxed, interestbearing educational (expense) deduction account -christened the “UIBEDA. The UIBEDA scheme facilitates shifting from direct educational subsidies to the use of publicly subsidized student loans, and also can be readily extended to promote selective immigration of workers who have incurred indebtedness for human capital investments abroad.