Capital accumulation and taxation in a general equilibrium model with risky human capital

We integrate life cycle precautionary saving and human capital investment by modeling both activities in a single general equilibrium setting. Allowing human capital investment to respond to earnings uncertainty significantly increases precautionary saving but not enough for simulated saving rates to reach historical levels in the U.S. In contrast to recent deterministic analyses, we show income taxation may actually stimulate human capital due to the insurance effect of. taxing uncertain returns. The same insurance effect helps explain why conversion to a wage tax base may lead to reduced savings, in contrast to some recent claims.