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Education and Efficient Redistribution

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Author Info
Robert A. J. Dur ()
Coenraad Teulings ()

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Abstract

Should education be subsidized for the purpose of redistribution? The usual argument against subsidies to education above the primary level is that the rich take up most education, so a subsidy would increase inequality. We show that there is a counteracting effect: an increase in the stock of human capital reduces the return to human capital and, therefore, pre-tax income inequality decreases. We consider a Walrasian world with perfect capital and insurance markets. Hence, in the absence of a strive for redistribution, the market generates the efficient level of investment in human capital. When there is a demand for redistribution, the general equilibrium effects on relative wages might make a subsidy to education an ingredient of a second-best optimal redistribution policy. Stimulating human capital formation results in a compression of the wage distribution, and hence reduces the need for distortionary redistributive taxation. We also study the political viability of education subsidies.

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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number CESifo Working Paper No. 592.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_592

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

References listed on IDEAS
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Full references

Cited by:
(explanations, 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.)

  1. A. Lans Bovenberg & Bas Jacobs, 2005. "Redistribution and Education Subsidies are Siamese Twins," Tinbergen Institute Discussion Papers 05-036/3, Tinbergen Institute. [Downloadable!]
    Other versions:
  2. Bas Jacobs, . "An investigation of education finance reform: Graduate taxes and income contingent loans in the Netherlands," CPB Discussion Papers 9, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  3. Rita Asplund, 2004. "A Macroeconomic Perspective on Education and Inequality," Discussion Papers 906, The Research Institute of the Finnish Economy. [Downloadable!]
  4. Bovenberg, A Lans & Jacobs, Bas, 2005. "Human Capital and Optimal Positive Taxation of Capital Income," CEPR Discussion Papers 5047, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Jacobs, Bas, 2007. "Optimal Redistributive Tax and Education Policies in General Equilibrium," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  6. Bas Jacobs, . "The lost race between schooling and technology," CPB Discussion Papers 25, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
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