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Abstract

This paper examines the effect of taxes on the individuals' choices of educational direction, and thus on the economy.s skill composition. A proportional labour tax induces too many workers with high innate ability to choose an educational type associated with high consumption value and low effort. This increases the skill mismatch and aggregate unemployment in the economy. The government can correct for this distortion by use of differentiated tuition fees or tax rates.

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File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7562
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Bibliographic Info

Paper provided by Copenhagen Business School, Department of Economics in its series Working Papers with number 23-2005.

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Length: 25 pages
Date of creation: 28 Nov 2005
Date of revision:
Handle: RePEc:hhs:cbsnow:2005_023

Contact details of provider:
Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Phone: 38 15 25 75
Fax: 38 15 26 65
Email:
Web page: http://www.cbs.dk/departments/econ/
More information through EDIRC

Related research

Keywords: Unemployment; matching; education; optimal taxation; tuition fees;

Find related papers by JEL classification:

• H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
• H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
• J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
• J68 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Public Policy

This paper has been announced in the following NEP Reports:

• NEP-ALL-2006-09-23 (All new papers)
• NEP-DGE-2006-09-23 (Dynamic General Equilibrium)
• NEP-EDU-2006-09-23 (Education)
• NEP-PBE-2006-09-23 (Public Economics)

References

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1. E. John Driffill & Harvey S. Rosen, 1984. "Taxation and Excess Burden: A Life-Cycle Perspective," NBER Working Papers 0698, National Bureau of Economic Research, Inc.
   
   • Driffill, E John & Rosen, Harvey S, 1983. "Taxation and Excess Burden: A Life Cycle Perspective," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 671-83, October.
2. Pissarides, Christopher A., 1998. "The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure," European Economic Review, Elsevier, vol. 42(1), pages 155-183, January.
   
   • Christopher A. Pissarides, 1997. "The Impact of Employment Tax Cuts on Unemployment and Wages: The Role of Unemployment Benefits and Tax Structure," CEP Discussion Papers dp0361, Centre for Economic Performance, LSE.
3. Bruce, Donald, 2000. "Effects of the United States tax system on transitions into self-employment," Labour Economics, Elsevier, vol. 7(5), pages 545-574, September.
4. Roger H. Gordon & Julie Berry Cullen, 2002. "Taxes and Entrepreneurial Activity: Theory and Evidence for the U.S," NBER Working Papers 9015, National Bureau of Economic Research, Inc.
5. Pestieau, Pierre & Possen, Uri M., 1991. "Tax evasion and occupational choice," Journal of Public Economics, Elsevier, vol. 45(1), pages 107-125, June.
   
   • Pestieau, P. & Possen, U., 1990. "Tax evasion and occupational choice," CORE Discussion Papers 1990033, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
   • Pestieau, P. & Possen, U.M., 1988. "Tax Evasion And Occupational Choice," Papers 404, Cornell - Department of Economics.
6. Parker, Simon C, 1996. "A Time Series Model of Self-Employment under Uncertainty," Economica, London School of Economics and Political Science, vol. 63(251), pages 459-75, August.
7. Michael J. Boskin, 1975. "Notes on the Tax Treatment of Human Capital," NBER Working Papers 0116, National Bureau of Economic Research, Inc.
8. R. Glenn Hubbard & William M. Gentry, 2000. "Tax Policy and Entrepreneurial Entry," American Economic Review, American Economic Association, vol. 90(2), pages 283-287, May.
9. Heckman, James J, 1976. "A Life-Cycle Model of Earnings, Learning, and Consumption," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S11-44, August.
10. Nielsen, Soren Bo & Sorensen, Peter Birch, 1997. "On the optimality of the Nordic system of dual income taxation," Journal of Public Economics, Elsevier, vol. 63(3), pages 311-329, February.
11. Theodore W. Schultz, 1960. "Capital Formation by Education," Journal of Political Economy, University of Chicago Press, vol. 68, pages 571.

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Citations

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Cited by:

1. Debora Di Gioacchino & Paolo Profeta, 2010. "Lobbying for Education in a Two-sector Model," Working Papers 138, University of Rome La Sapienza, Department of Public Economics.
   
   • Debora Di Gioacchino & Paola Profeta, 2011. "Lobbying for Education in a Two-sector Model," CESifo Working Paper Series 3446, CESifo Group Munich.
2. Annette Alstadsæter & Hans Henrik Sievertsen, 2009. "The Consumption Value of Higher Education," CESifo Working Paper Series 2871, CESifo Group Munich.

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