Optimal Tax and Education Policy When Agents Differ in Altruism and Productivity
AbstractThis paper studies the design of education policies in a setting of overlapping generations with heterogeneous individuals. Individuals differ in productivity (high and low earning ability) and in altruism (altruists and non altruists). Only altruistic parents invest in education out of some joy of giving. Their investment determines the probability that a child has high ability. Education policies consist of a subsidy on private educational investments and of public education. We show that when an income tax is available, the subsidy on education should not depend on redistribution. Instead, it is determined by the following terms. First, a Pigouvian term which arises because under warm glow altruism parents¡¯ utility does not properly account for the impact of education on future generations. The second term captures a ¡°merit good¡± effect, which arises when the warm glow term is not fully included in social welfare (possibility of laundering out). Third, depending on the information structure there may be a substitution term that arises because the demand for second period consumption and for education transfer are interdependent. The first two terms are of opposite sign and the optimal subsidy may be positive or negative. Finally, we derive conditions under which public education is desirable. Public education affects also the probability of being highly productive for the altruists and the non altruists. Its desirability will in part depend on its substitutability with private educational investment.
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Bibliographic InfoArticle provided by Society for AEF in its journal Annals of Economics and Finance.
Volume (Year): 6 (2005)
Issue (Month): 2 (November)
Tax; Education; Altruism;
Other versions of this item:
- CREMER, Helmuth & PESTIEAU, Pierre & THIBAULT, Emmanuel & VIDAL, Jean-Pierre, . "Optimal tax and education policy when agents differ in altruism and productivity," CORE Discussion Papers RP -1830, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Cremer, Helmuth & Pestieau, Pierre & Rochet, Jean-Charles, 1999. "Capital Income Taxation when Inherited wealth is not Observable," IDEI Working Papers 109, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2001.
- CREMER, Helmuth & PESTIEAU, Pierre & ROCHET, Jean-Charles, . "Capital income taxation when inherited wealth is not observable," CORE Discussion Papers RP -1700, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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