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Education and Efficient Redistribution

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  • Robert A.J. Dur

    ()
    (Erasmus University Rotterdam)

  • Coen N. Teulings

    ()
    (SEO, University of Amsterdam)

Abstract

Should education be subsidized for the purpose ofredistribution? The usual argument against subsidies to education abovethe primary level is that the rich take up most education, soa subsidy would increase inequality. We show that there is acounteracting effect: an increase in the stock of human capitalreduces the return to human capital and, therefore, pre-tax income inequality decreases.We consider a Walrasian world withperfect capital and insurance markets. Hence, in the absence ofa strive for redistribution, the market generates the efficient levelof investment in human capital. When there is a demand forredistribution, the general equilibrium effects on relative wagesmight make a subsidy to education an ingredient of a second-bestoptimal redistribution policy. Stimulating human capitalformation results in a compression of the wage distribution, and hencereduces the need for distortionary redistributive taxation. Wealso study the political viability of education subsidies.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 01-090/3.

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Date of creation: 03 Oct 2001
Date of revision: 12 Jun 2003
Handle: RePEc:dgr:uvatin:20010090

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Citations

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Cited by:
  1. 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.
  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, Universitat de Barcelona. Espai de Recerca en Economia 268, Universitat de Barcelona. Espai de Recerca en Economia.
  3. Merzyn, Wolfram & Ursprung, Heinrich W., 2005. "Voter support for privatizing education: evidence on self-interest and ideology," European Journal of Political Economy, Elsevier, Elsevier, vol. 21(1), pages 33-58, March.
  4. Bas Jacobs & A. Bovenberg, 2010. "Human capital and optimal positive taxation of capital income," International Tax and Public Finance, Springer, Springer, vol. 17(5), pages 451-478, October.
  5. Bas Jacobs, 2003. "The lost race between schooling and technology," CPB Discussion Paper 25, CPB Netherlands Bureau for Economic Policy Analysis.
  6. Bovenberg, A Lans & Jacobs, Bas, 2001. "Redistribution and Education Subsidies are Siamese Twins," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3099, 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, Elsevier, vol. 29(4), pages 597-605, August.
  8. Asplund, Rita, 2004. "A Macroeconomic Perspective on Education and Inequality," Discussion Papers, The Research Institute of the Finnish Economy 906, The Research Institute of the Finnish Economy.
  9. Bas Jacobs, 2007. "Optimal Redistributive Tax and Education Policies in General Equilibrium," CESifo Working Paper Series 2162, CESifo Group Munich.

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