International Tax and Public Finance

, Volume 17, Issue 1, pp 52–66 | Cite as

Taxation and skills investment in frictional labor markets



This paper examines the effects of wage taxation and corporate income taxation on training investment in frictional labor markets. Because of labor market frictions, the wage structure is compressed and workers do not capture the entire return from their skills. As a result, both firms and workers have incentives to support part of the costs of training investments. The analysis shows that when decisions to invest in training are made by firms and workers acting cooperatively, a wage tax increases the level of investment in skills whereas a corporate income tax decreases it. In this case, the introduction of a small wage tax unambiguously increases efficiency. The effects of both types of taxes on training are reversed when investment decisions are taken by firms alone. In any case, a corporate income tax is not neutral with respect to decisions to invest in skills even if the full cost of investment is deducted from taxable income in the period when it is incurred and the tax system provides full loss offset.


Wage taxation Corporate income taxation Investment in skills 

JEL Classification

H24 H25 J24 


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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of OttawaOttawaCanada

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