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Optimal Tax and Education Policy When Agents Differ in Altruism and Productivity

  • Helmuth Cremer

    (University of Toulouse (IDEI and GREMAQ))

  • Pierre Pestieau

    (CREPP, University of Liege, CORE, and Delta)

  • Emmanuel Thibault

    (University of Toulouse (GREMAQ) and University of Perpignan (GEREM))

  • Jean-Pierre Vidal

    (European Central Bank)

This paper studies the design of education policies in a setting of overlapping generations with heterogeneous individuals. Individuals differ in productivity (high and low earning ability) and in altruism (altruists and non altruists). Only altruistic parents invest in education out of some joy of giving. Their investment determines the probability that a child has high ability. Education policies consist of a subsidy on private educational investments and of public education. We show that when an income tax is available, the subsidy on education should not depend on redistribution. Instead, it is determined by the following terms. First, a Pigouvian term which arises because under warm glow altruism parents¡¯ utility does not properly account for the impact of education on future generations. The second term captures a ¡°merit good¡± effect, which arises when the warm glow term is not fully included in social welfare (possibility of laundering out). Third, depending on the information structure there may be a substitution term that arises because the demand for second period consumption and for education transfer are interdependent. The first two terms are of opposite sign and the optimal subsidy may be positive or negative. Finally, we derive conditions under which public education is desirable. Public education affects also the probability of being highly productive for the altruists and the non altruists. Its desirability will in part depend on its substitutability with private educational investment.

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Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 6 (2005)
Issue (Month): 2 (November)
Pages: 209-228

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Handle: RePEc:cuf:journl:y:2005:v:6:i:2:p:209-228
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  1. Cremer, Helmuth & Pestieau, Pierre & Rochet, Jean-Charles, 2003. "Capital income taxation when inherited wealth is not observable," Journal of Public Economics, Elsevier, vol. 87(11), pages 2475-2490, October.
  2. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
  3. Fernandez, Raquel & Rogerson, Richard, 1996. "Income Distribution, Communities, and the Quality of Public Education," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 135-64, February.
  4. Loury, Glenn C, 1981. "Intergenerational Transfers and the Distribution of Earnings," Econometrica, Econometric Society, vol. 49(4), pages 843-67, June.
  5. Glomm, Gerhard & Ravikumar, B, 1992. "Public versus Private Investment in Human Capital Endogenous Growth and Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 818-34, August.
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