Firm Training and Capital Taxation

In the setup of an overlapping-generations model with firm training, I analyze the consequences of a tax on capital income. A capital tax influences training investments via two opposing effects. On the one hand, it lowers the stock of physical capital and thereby the productivity of training. On the other hand, the degree of wage compression is increased, improving the incentives to train. In principle either effect can dominate. If the wage-compression effect dominates, it is possible that a tax on capital income increases welfare, since underinvestment in training is more severe than underinvestment in physical capital.