Louis Kaplow, On the Divergence Between ‘Ideal’ and Conventional Income-Tax Treatment of Human Capital, 86 Am. Econ. Rev. 347 (1996).
Abstract: A substantial majority of all capital is human capital, and most revenue from the income tax is from returns on human capital, wage income. Nevertheless, work analyzing the comprehensive, accrual ("ideal") income taxation of capital has focused on physical and financial capital. Applying the learning from this work to human capital suggests that human capital is significantly undertaxed under a conventional income tax, the actual result being close to what would be appropriate under a wage or consumption tax. This undertaxation does not, however, directly alter the marginal return to investments in human capital, although it does affect intertemporal behavior and bear on the interpretation of arguments about whether income is a distributively appealing base for taxation.