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Are Education Subsidies an Efficient Redistributive Device?

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  • Robert A.J. Dur

    ()
    (Erasmus University Rotterdam)

  • Coen N. Teulings

    ()

Abstract

We argue that promoting education may be a means to reduceincome inequality. When workers of different skill levels areimperfect substitutes in production, an increase in the level ofhuman capital in the economy reduces the return to education.Hence, a given compression of after-tax incomes can be achievedat lower marginal tax rates. Optimal redistribution policy faces atrade-off between the distortions of taxes on effort and the distortionsof education subsidies on the investment in human capital.We discuss empirical evidence on three crucial elasticities. Ourargument explains the actual pattern of education subsidies inOECD countries quite well.However, there is an offsetting effect. When education andability are complements, high ability types take up more education.A subsidy to education will then favor these types. Wediscuss the condition for the net effect of education subsidies tobe progressive. The empirical evidence suggest that this conditionis critical for a simple education subsidy. We consider somemore elaborate schemes for education subsidies.This discussion paper has resulted in ch. 4 of 'Labor Market Institutions and Public Regulation' , pp. 123-61, (Jonas Agell, Michael Keen, Alfons Weichenrieder (eds.)), 2004, MIT Press, 228 p.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-024/3.

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Date of creation: 17 Mar 2003
Date of revision: 19 Sep 2003
Handle: RePEc:dgr:uvatin:20030024

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Web page: http://www.tinbergen.nl

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Keywords: income inequality; optimal taxation; education.;

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Citations

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Cited by:
  1. Coen N. Teulings, 2005. "Comparative Advantage, Relative Wages, and the Accumulation of Human Capital," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 425-461, April.
  2. Robert Dur & Amihai Glazer, 2005. "Subsidizing Enjoyable Education," Tinbergen Institute Discussion Papers 05-010/1, Tinbergen Institute, revised 29 Aug 2007.
  3. Salvatore Barbaro, 2004. "Tax Distortion, Countervailing Subsidies and Income Redistribution," Departmental Discussion Papers 121, University of Goettingen, Department of Economics.
  4. von Greiff, Camilo, 2007. "Effects of Redistribution Policies - Who Gains and Who Loses?," Research Papers in Economics 2007:12, Stockholm University, Department of Economics.
  5. Bas Jacobs, 2007. "Optimal Redistributive Tax and Education Policies in General Equilibrium," CESifo Working Paper Series 2162, CESifo Group Munich.

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