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Optimal Progressive Labor Income Taxation and Education Subsidies When Education Decisions and Intergenerational Transfers Are Endogenous

Author

Listed:
  • Dirk Krueger
  • Alexander Ludwig

Abstract

We quantitatively characterize the optimal mix of progressive income taxes and education subsidies in a model with endogenous human capital formation, borrowing constraints, income risk and incomplete financial markets. In addition to the distortions of labor supply, progressive taxes weaken the incentives to acquire education. The latter distortion can potentially be mitigated by an education subsidy. We find that the welfare-maximizing fiscal policy is indeed characterized by a substantially progressive labor income tax code and a positive subsidy for college education. Both the degree of tax progressivity and the education subsidy are larger than in the current US status quo.

Suggested Citation

  • Dirk Krueger & Alexander Ludwig, 2013. "Optimal Progressive Labor Income Taxation and Education Subsidies When Education Decisions and Intergenerational Transfers Are Endogenous," American Economic Review, American Economic Association, vol. 103(3), pages 496-501, May.
  • Handle: RePEc:aea:aecrev:v:103:y:2013:i:3:p:496-501 Note: DOI: 10.1257/aer.103.3.496
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    References listed on IDEAS

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    1. Findeisen, Sebastian & Sachs, Dominik, 2016. "Education and optimal dynamic taxation: The role of income-contingent student loans," Journal of Public Economics, Elsevier, pages 1-21.
    2. Bas Jacobs & A. Bovenberg, 2010. "Human capital and optimal positive taxation of capital income," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(5), pages 451-478, October.
    3. Fatih Guvenen & Burhanettin Kuruscu & Serdar Ozkan, 2009. "Taxation of human capital and wage inequality: a cross-country analysis," Staff Report 438, Federal Reserve Bank of Minneapolis.
    4. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2009. "Taxing Capital? Not a Bad Idea after All!," American Economic Review, American Economic Association, pages 25-48.
    5. Fatih Guvenen & Burhanettin Kuruscu & Serdar Ozkan, 2014. "Taxation of Human Capital and Wage Inequality: A Cross-Country Analysis," Review of Economic Studies, Oxford University Press, vol. 81(2), pages 818-850.
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    Citations

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    Cited by:

    1. Fehr, Hans & Kindermann, Fabian, 2015. "Taxing capital along the transition—Not a bad idea after all?," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 64-77.
    2. Piero Gottardi & Atsushi Kajii & Tomoyuki Nakajima, 2015. "Optimal Taxation and Debt with Uninsurable Risks to Human Capital Accumulation," American Economic Review, American Economic Association, pages 3443-3470.
    3. Ricardo Reis & Alisdair McKay, 2015. "Optimal Automatic Stabilizers," 2015 Meeting Papers 608, Society for Economic Dynamics.
    4. Bettina Brueggemann, 2016. "Higher Taxes at the Top: The Role of Entrepreneurs," 2016 Meeting Papers 332, Society for Economic Dynamics.
    5. Bettina Brueggemann, 2017. "Higher Taxes at the Top: The Role of Entrepreneurs," Department of Economics Working Papers 2017-16, McMaster University.
    6. Krueger, Dirk & Ludwig, Alexander, 2016. "On the optimal provision of social insurance: Progressive taxation versus education subsidies in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 77(C), pages 72-98.
    7. Ben Heijdra & Fabian Kindermann & Laurie Reijnders, 2017. "Life in shakles? The quantitative implications of reforming the educational financing system," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 25, pages 37-57, April.
    8. Kindermann, Fabian & Krueger, Dirk, 2014. "High marginal tax rates on the top 1%?," CFS Working Paper Series 473, Center for Financial Studies (CFS).
    9. Röhrs, Sigrid & Winter, Christoph, 2015. "Public versus private provision of liquidity: Is there a trade-off?," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 314-339.
    10. Bas Jacobs & Hongyan Yang, 2016. "Second-best income taxation and education policy with endogenous human capital and borrowing constraints," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(2), pages 234-268, April.
    11. Oliwia Komada & Krzysztof Makarski & Joanna Tyrowicz, 2017. "Welfare effects of fiscal policy in reforming the pension system," GRAPE Working Papers 11, GRAPE Group for Research in Applied Economics.
    12. Cassou, Steven P. & Gorostiaga, Arantza & Uribe-Zubiaga, Iker, 2013. "Policy effects of the elasticity of substitution across labor types in life cycle models," Economic Modelling, Elsevier, vol. 35(C), pages 59-70.
    13. Findeisen, Sebastian & Sachs, Dominik, 2016. "Education and optimal dynamic taxation: The role of income-contingent student loans," Journal of Public Economics, Elsevier, pages 1-21.
    14. Yena Park, 2014. "Constrained Efficiency in a Risky Human Capital Model," RCER Working Papers 585, University of Rochester - Center for Economic Research (RCER).

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • 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
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • I21 - Health, Education, and Welfare - - Education - - - Analysis of Education

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