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Are education subsides an efficient redistributive device?

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  • Robert Dur
  • Coen 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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File URL: http://eprints.lse.ac.uk/19493/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 19493.

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Length: 43 pages
Date of creation: May 2003
Date of revision:
Handle: RePEc:ehl:lserod:19493

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  1. Keane, Michael P & Wolpin, Kenneth I, 2001. "The Effect of Parental Transfers and Borrowing Constraints on Educational Attainment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1051-1103, November.
  2. Roland Benabou, 2002. "Tax and Education Policy in a Heterogeneous-Agent Economy: What Levels of Redistribution Maximize Growth and Efficiency?," Econometrica, Econometric Society, vol. 70(2), pages 481-517, March.
  3. Deininger, Klaus & Squire, Lyn, 1996. "A New Data Set Measuring Income Inequality," World Bank Economic Review, World Bank Group, vol. 10(3), pages 565-91, September.
  4. Goldin, Claudia, 1999. "Egalitarianism and the Returns to Education during the Great Transformation of American Education," Scholarly Articles 2623652, Harvard University Department of Economics.
  5. John Shea, 1997. "Does Parents' Money Matter?," NBER Working Papers 6026, National Bureau of Economic Research, Inc.
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  7. Johnson, George E, 1984. "Subsidies for Higher Education," Journal of Labor Economics, University of Chicago Press, vol. 2(3), pages 303-18, July.
  8. A. Lans Bovenberg & Bas Jacobs, 2005. "Redistribution and Education Subsidies are Siamese Twins," Tinbergen Institute Discussion Papers 05-036/3, Tinbergen Institute.
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Citations

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Cited by:
  1. Dur, Robert & Glazer, Amihai, 2008. "Subsidizing Enjoyable Education," Labour Economics, Elsevier, vol. 15(5), pages 1023-1039, October.
  2. von Greiff, Camilo, 2007. "Effects of Redistribution Policies - Who Gains and Who Loses?," Research Papers in Economics 2007:12, Stockholm University, Department of Economics.
  3. 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.
  4. Salvatore Barbaro, 2004. "Tax Distortion, Countervailing Subsidies and Income Redistribution," Departmental Discussion Papers 121, University of Goettingen, 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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