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Education and Efficient Redistribution

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Author Info
Robert A.J. Dur () (Erasmus University Rotterdam)
Coen N. Teulings () (SEO, University of Amsterdam)

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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 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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  1. 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:
  2. Rita Asplund, 2004. "A Macroeconomic Perspective on Education and Inequality," Discussion Papers 906, The Research Institute of the Finnish Economy. [Downloadable!]
  3. Bovenberg, A Lans & Jacobs, Bas, 2001. "Redistribution and Education Subsidies are Siamese Twins," CEPR Discussion Papers 3099, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Bas Jacobs, . "The lost race between schooling and technology," CPB Discussion Papers 25, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
    Other versions:
  5. 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!]
  6. Jacobs, Bas, 2007. "Optimal Redistributive Tax and Education Policies in General Equilibrium," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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