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Education and Efficient Redistribution

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  • Robert A. J. Dur
  • Coenraad N. Teulings

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 Group Munich in its series CESifo Working Paper Series with number 592.

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

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Citations

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Cited by:
  1. Bovenberg, A.L. & Jacobs, B., 2001. "Redistribution and Education Subsidies are Siamese Twins," Discussion Paper 2001-82, Tilburg University, Center for Economic Research.
  2. Daniel Montolio (University of Barcelona (UB) and Barcelona Institute of Economics (IEB)) & Amedeo Piolatto (University of Barcelona (UB) and Barcelona Institute of Economics (IEB)), 2011. "Financing public education when altruistic agents have retirement concerns," Working Papers in Economics 268, Universitat de Barcelona. Espai de Recerca en Economia.
  3. Bas Jacobs, 2007. "Optimal Redistributive Tax and Education Policies in General Equilibrium," CESifo Working Paper Series 2162, CESifo Group Munich.
  4. Asplund, Rita, 2004. "A Macroeconomic Perspective on Education and Inequality," Discussion Papers 906, The Research Institute of the Finnish Economy.
  5. Wolfram Merzyn & Heinrich Ursprung, 2003. "Voter Support for Privatizing Education: Evidence on Self-Interest and Ideology," CESifo Working Paper Series 999, CESifo Group Munich.
  6. 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.
  7. Schneider, Andrea, 2010. "Redistributive taxation vs. education subsidies: Fostering equality and social mobility in an intergenerational model," Economics of Education Review, Elsevier, vol. 29(4), pages 597-605, August.
  8. Bas Jacobs, 2003. "The lost race between schooling and technology," CPB Discussion Paper 25, CPB Netherlands Bureau for Economic Policy Analysis.
  9. Bas Jacobs, 2002. "An investigation of education finance reform; graduate taxes and income contingent loans in the Netherlands," CPB Discussion Paper 9, CPB Netherlands Bureau for Economic Policy Analysis.

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