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Efficient Tax Policy Ranks Education Higher Than Saving

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  • Richter, Wolfram F.

    ()
    (TU Dortmund)

Abstract

Assuming a two-period model with endogenous choices of labour, education, and saving, it is shown to be second-best efficient not to distort the choice of education. In general this implies distorting the saving decision. Hence a strict order of policy priority is derived. Efficient tax policy ranks education higher than saving. The result assumes an isoelastic earnings function and holds else for arbitrary utility functions. Isoelasticity of earnings is justified with reference to the empirically well-founded Power Law of Learning.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3451.

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Length: 23 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:iza:izadps:dp3451

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Keywords: efficient taxation of human and nonhuman capital investment; labour and saving; endogenous choice of education; power law of learning;

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References

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  1. Wolfram F. Richter, 2007. "Taxing Human Capital Efficiently – The Double Dividend of Taxing Nonqualified Labour More Heavily Than Qualified Labour," Ruhr Economic Papers 0012, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  2. Bas Jacobs & A. Bovenberg, 2010. "Human capital and optimal positive taxation of capital income," International Tax and Public Finance, Springer, vol. 17(5), pages 451-478, October.
  3. Bovenberg, A Lans & Jacobs, Bas, 2001. "Redistribution and Education Subsidies are Siamese Twins," CEPR Discussion Papers 3099, C.E.P.R. Discussion Papers.
  4. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  5. Carneiro, Pedro & Heckman, James J., 2003. "Human Capital Policy," IZA Discussion Papers 821, Institute for the Study of Labor (IZA).
  6. repec:dgr:uvatin:2005035 is not listed on IDEAS
  7. Jones, Larry E. & Manuelli, Rodolfo E. & Rossi, Peter E., 1997. "On the Optimal Taxation of Capital Income," Journal of Economic Theory, Elsevier, vol. 73(1), pages 93-117, March.
  8. Trostel, Philip A, 2002. "Should Education Be Publicly Provided?," Bulletin of Economic Research, Wiley Blackwell, vol. 54(4), pages 373-91, October.
  9. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  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. Hartog,Joop & Maassen van den Brink,Henriëtte (ed.), 2007. "Human Capital," Cambridge Books, Cambridge University Press, number 9780521873161, November.
  12. Andrew Atkeson & V.V. Chari & Patrick J. Kehoe, 1999. "Taxing capital income: a bad idea," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-17.
  13. Trostel, Philip A, 1993. "The Effect of Taxation on Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 327-50, April.
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Cited by:
  1. Wolfram F. Richter, 2009. "Taxing Education in Ramsey's Tradition," Ruhr Economic Papers 0140, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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