Optimal Taxation of Education with an Initial Endowment of Human Capital
AbstractBovenberg and Jacobs (2005) and Richter (2009) derive the education efficiency theorem: In a second-best optimum, the education decision is undistorted if the function expressing the stock of human capital features a constant elasticity with respect to education. I drop this assumption. The household inherits an initial stock of human capital, implying that the aforementioned elasticity is increasing. In a two-period Ramsey model of optimal taxation, I show that the education efficiency theorem does not hold. In a second-best optimum, the discounted marginal social return to education is smaller than the marginal social cost. The household overinvests in human capital relative to the first best. The government effectively subsidizes the return to education.
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Bibliographic InfoPaper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0210.
Length: 29 pages
Date of creation: Oct 2010
Date of revision:
Find related papers by JEL classification:
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- I28 - Health, Education, and Welfare - - Education - - - Government Policy
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-06 (All new papers)
- NEP-DGE-2010-11-06 (Dynamic General Equilibrium)
- NEP-EDU-2010-11-06 (Education)
- NEP-PUB-2010-11-06 (Public Finance)
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- Wolfram F. Richter, 2010.
"Efficient Education Policy - A Second-Order Elasticity Rule,"
CESifo Working Paper Series
2969, CESifo Group Munich.
- Wolfram F. Richter, 2011. "Efficient Education Policy - A Second-Order Elasticity Rule," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 67(1), pages 1-7, March.
- Richter, Wolfram F. & Braun, Christoph, 2009.
"Efficient Subsidization of Human Capital Accumulation with Overlapping Generations and Endogenous Growth,"
IZA Discussion Papers
4629, Institute for the Study of Labor (IZA).
- Wolfram F. Richter & Christoph Braun, 2010. "Efficient Subsidization of Human Capital Accumulation with Overlapping Generations and Endogenous Growth," CESifo Working Paper Series 2982, CESifo Group Munich.
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