Tax-deductibility and investment in human capital: Evidence from a panel of individual tax returns

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 18.10.2005, 12:15 - 13:30


Presentation by 

Edwin Leuven (University of Oslo)


To stimulate investment in training by employees, the Dutch tax system allows a deduction of direct training expenditures from taxable income. This paper investigates to what extent the resulting cost reduction encourages training investments. Two different identification strategies are used. The first strategy uses the progressive structure of the income tax scheme and compares groups with taxable income just above or just below kinks. The second strategy takes advantage of the 2001 tax reform, which implied a substantial change in marginal tax rates. These strategies exploit different sources of exogenous variation and are based on different identifying assumptions. Nevertheless, the results point in the same direction: tax incentives increase human capital investment.

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