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Unequal wages for equal utilities

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  • CREMER, Helmuth
  • PESTIAU, Pierre

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

  • RACIONERO, Maria

Abstract

When educational policy is supplemented by a redistributive income tax, and when individualsdiffer in their ability to benefit from education, the optimal policy is typically rather regressive.Resources are concentrated on the most able individuals in order to get a "cake" as big aspossible to share among individuals through income taxation. In this paper we put forwardanother reason to push for regressive education. It is not linked to heterogeneity in innate ability to benefit from education but to pervasive non-convexities that arise in the optimal income tax problem when individual productivities are endogenous. For simplicity we assume a lineareducation technology and a given total education budget. To give the equal wage outcome thebest chance to emerge, we also assume that individuals have identical learning abilities.Nevertheless, it turns out that in the first-best wage inequality is always preferable to wageequality. Even more surprisingly, this conclusion remains valid in the second-best (unless adhoc restriction on the feasible degree of a wage differentiation are imposed). This is in spite ofthe fact that wage equalization would eliminate any need for distortionary income taxation.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2007095.

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Date of creation: 01 Dec 2007
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Handle: RePEc:cor:louvco:2007095

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Keywords: education policy; optimal income taxation; equal opportunity;

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References

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  1. Darío Maldonado, 2008. "Education policies and optimal taxation," International Tax and Public Finance, Springer, vol. 15(2), pages 131-143, April.
  2. Craig Brett & John Weymark, 2007. "The Impact of Changing Skill Levels on Optimal Nonlinear Income Taxes," Vanderbilt University Department of Economics Working Papers 0708, Vanderbilt University Department of Economics.
  3. Ulph, David, 1977. "On the optimal distribution of income and educational expenditure," Journal of Public Economics, Elsevier, vol. 8(3), pages 341-356, December.
  4. Becker, Gary S, 1985. "Human Capital, Effort, and the Sexual Division of Labor," Journal of Labor Economics, University of Chicago Press, vol. 3(1), pages S33-58, January.
  5. A. Lans Bovenberg & Bas Jacobs, 2005. "Redistribution and Education Subsidies are Siamese Twins," Tinbergen Institute Discussion Papers 05-036/3, Tinbergen Institute.
  6. Arrow, Kenneth J, 1971. "A Utilitarian Approach to the Concept of Equality in Public Expenditure," The Quarterly Journal of Economics, MIT Press, vol. 85(3), pages 409-15, August.
  7. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
  8. Battaglini, Marco & Coate, Stephen, 2008. "Pareto efficient income taxation with stochastic abilities," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 844-868, April.
  9. Booth, A.L. & Coles, M.G., 2010. "Tax policy and returns to education," Labour Economics, Elsevier, vol. 17(1), pages 291-301, January.
  10. Glomm, Gerhard & Ravikumar, B, 1992. "Public versus Private Investment in Human Capital Endogenous Growth and Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 818-34, August.
  11. James M. Poterba, 1996. "Government Intervention in the Markets for Education and Health Care: How and Why?," NBER Chapters, in: Individual and Social Responsibility: Child Care, Education, Medical Care, and Long-Term Care in America, pages 277-308 National Bureau of Economic Research, Inc.
  12. 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.
  13. Bruno, Michael, 1976. "Equality, complementarity and the incidence of public expenditures," Journal of Public Economics, Elsevier, vol. 6(4), pages 395-407, November.
  14. A. Lans Bovenberg & Bas Jacobs, 2005. "Redistribution and Education Subsidies are Siamese Twins," Tinbergen Institute Discussion Papers 05-036/3, Tinbergen Institute.
  15. Alison Booth & Melvyn Coles, 2007. "A Microfoundation For Increasing Returns In Human Capital Accumulation And The Under-Participation Trap," CAMA Working Papers 2007-07, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  16. Wildasin, David E., 1986. "Spatial variation of the marginal utility of income and unequal treatment of equals," Journal of Urban Economics, Elsevier, vol. 19(1), pages 125-129, January.
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Citations

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Cited by:
  1. Cremer, Helmuth & Pestieau, Pierre & Roeder, Kerstin, 2012. "United but (un)equal: human capital, probability of divorce and the marriage contract," TSE Working Papers 12-363, Toulouse School of Economics (TSE).
  2. Helmuth Cremer & Philippe De Donder & Pierre Pestieau, 2010. "Education and Social Mobility," CESifo Working Paper Series 2951, CESifo Group Munich.
  3. Leung, Tin Cheuk & Yazici, Hakki, 2011. "On the Optimal Skill Distribution in a Mirrleesian Economy," MPRA Paper 32596, University Library of Munich, Germany.
  4. Efthymios Athanasiou, 2012. "Endogenous productivity and equality of opportunity," Social Choice and Welfare, Springer, vol. 39(1), pages 59-89, June.

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