Optimal Redistributive Tax and Education Policies in General Equilibrium
AbstractShould a redistributive government optimally subsidize education to provoke a reduction in the skill premium through general equilibrium effects on wages? To answer this question, this paper studies optimal linear and non-linear redistributive income taxes and education subsidies in two-type models with endogenous human capital formation, endogenous labor supply, and endogenous wage rates. Under optimal linear policies, education should not be subsidized so as to reduce the skill premium. Linear income taxes are distributionally equivalent to (negative) linear education subsidies, but linear taxes do not distort investment in human capital, whether general equilibrium effects are present or not. If skilled labor supply is more elastic than unskilled labor supply, optimal redistributive linear income taxes are lowered as the distributional gains of linear taxes are offset by a rise in the skill premium. Moreover, the optimal linear income tax may even become negative if general equilibrium effects are sufficiently strong. Under non-linear taxation, governments can directly steer the skill premium by exploiting non-linearities in the policy schedules. At the top, the optimal marginal income tax rate is negative, and the optimal marginal education subsidy is positive. At the bottom, the optimal marginal income tax rate is positive, and education is optimally taxed at the margin. Hence, optimal non-linear tax and education policies compress wage differentials, which contributes to redistribution. Simulations show that the top rate and marginal education subsidies are close to zero for a wide range of plausible parameters. Only when high-ability and low-ability workers are rather poor substitutes in production, marginal education subsidies on the high type and marginal education taxes on the low type substantially differ from zero.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2162.
Date of creation: 2007
Date of revision:
human capital; general equilibrium; education subsidies; optimal taxation; direct and indirect redistribution;
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.:
- Feldstein, Martin, 1973. "On the optimal progressivity of the income tax," Journal of Public Economics, Elsevier, vol. 2(4), pages 357-376.
- Saez, Emmanuel, 2004.
"Direct or indirect tax instruments for redistribution: short-run versus long-run,"
Journal of Public Economics,
Elsevier, vol. 88(3-4), pages 503-518, March.
- Emmanuel Saez, 2002. "Direct or Indirect Tax Instruments for Redistribution: Short-run versus Long-run," NBER Working Papers 8833, National Bureau of Economic Research, Inc.
- Allen, Franklin, 1982. "Optimal linear income taxation with general equilibrium effects on wages," Journal of Public Economics, Elsevier, vol. 17(2), pages 135-143, March.
- Robert Dur & Coen Teulings, 2003.
"Are Education Subsides an Efficient Redistributive Device?,"
CEE Discussion Papers
0030, Centre for the Economics of Education, LSE.
- Robert Dur & Coen Teulings, 2003. "Are education subsides an efficient redistributive device?," LSE Research Online Documents on Economics 19493, London School of Economics and Political Science, LSE Library.
- Robert A.J. Dur & Coen N. Teulings, 2003. "Are Education Subsidies an Efficient Redistributive Device?," Tinbergen Institute Discussion Papers 03-024/3, Tinbergen Institute, revised 19 Sep 2003.
- Gruber, Jon & Saez, Emmanuel, 2002.
"The elasticity of taxable income: evidence and implications,"
Journal of Public Economics,
Elsevier, vol. 84(1), pages 1-32, April.
- Jon Gruber & Emmanuel Saez, 2000. "The Elasticity of Taxable Income: Evidence and Implications," NBER Working Papers 7512, National Bureau of Economic Research, Inc.
- Joseph E. Stiglitz, 1981.
"Self-Selection and Pareto Efficient Taxation,"
NBER Working Papers
0632, National Bureau of Economic Research, Inc.
- Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, vol. 7(2), pages 203-235, April.
- Naito, Hisahiro, 2004.
"Endogenous human capital accumulation, comparative advantage and direct vs. indirect redistribution,"
Journal of Public Economics,
Elsevier, vol. 88(12), pages 2685-2710, December.
- Hisahiro Naito, 2003. "Endogenous Human Capital Accumulation, Comparative Advantage and Direct vs. Indirect Redistribution," ISER Discussion Paper 0590, Institute of Social and Economic Research, Osaka University.
- Dixit, Avinash K & Sandmo, Angar, 1977. " Some Simplified Formulae for Optimal Income Taxation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(4), pages 417-23.
- Carneiro, Pedro & Heckman, James J., 2003.
"Human Capital Policy,"
IZA Discussion Papers
821, Institute for the Study of Labor (IZA).
- Sheshinski, Eytan, 1972. "The Optimal Linear Income-Tax," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 297-302, July.
- Robert A. J. Dur & Coenraad N. Teulings, 2001.
"Education and Efficient Redistribution,"
CESifo Working Paper Series
592, CESifo Group Munich.
- Hartog,Joop & Maassen van den Brink,Henriëtte (ed.), 2007. "Human Capital," Cambridge Books, Cambridge University Press, number 9780521873161, April.
- Naito Hisahiro, 2007. "Atkinson-Stiglitz Theorem with Endogenous Human Capital Accumulation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-19, September.
- Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
- Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
- Emmanuel Saez, 2000.
"Using Elasticities to Derive Optimal Income Tax Rates,"
NBER Working Papers
7628, National Bureau of Economic Research, Inc.
- Saez, Emmanuel, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Wiley Blackwell, vol. 68(1), pages 205-29, January.
- Naito, Hisahiro, 1999. "Re-examination of uniform commodity taxes under a non-linear income tax system and its implication for production efficiency," Journal of Public Economics, Elsevier, vol. 71(2), pages 165-188, February.
- Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
- Stephen V. Cameron & Christopher Taber, 2004. "Estimation of Educational Borrowing Constraints Using Returns to Schooling," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 132-182, February.
- Card, David, 1999. "The causal effect of education on earnings," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 30, pages 1801-1863 Elsevier.
- Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March.
- C. Mendolicchio & D. Paolini & T. Pietra, 2010.
"Income taxes, subsidies to education, and investments in human capital,"
701, Dipartimento Scienze Economiche, Universita' di Bologna.
- Mendolicchio, Concetta & Paolini, Dimitri & Pietra, Tito, 2011. "Income taxes, subsidies to education, and investments in human capital," IAB Discussion Paper 201107, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
- Marie-Hélène Cloutier & John Cockburn & Bernard Decaluwé, 2008. "Education and Poverty in Vietnam: a Computable General Equilibrium Analysis," Cahiers de recherche 0804, CIRPEE.
- Bas Jacobs & A. Lans Bovenberg, 2011.
"Optimal Taxation of Human Capital and the Earnings Function,"
Journal of Public Economic Theory,
Association for Public Economic Theory, vol. 13(6), pages 957-971, December.
- Bas Jacobs & Lans Bovenberg, 2008. "Optimal Taxation of Human Capital and theEarnings Function," CESifo Working Paper Series 2250, CESifo Group Munich.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.