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Education and optimal dynamic taxation: The role of income-contingent student loans

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  • Findeisen, Sebastian
  • Sachs, Dominik

Abstract

We study the optimal design of integrated education finance and tax systems. The distribution of wages is endogenously determined by the costly education decisions of heterogeneous individuals before labor market entry. Consistent with empirical evidence, this human capital investment decision is risky. We find that an integrated education and tax system in which the government provides education loans to young individuals coupled with income-contingent repayment can always be designed in a Pareto optimal way. We present a simple empirically driven application of the framework to US data in which individuals make a college entry decision. We find the optimal repayment schemes for college loans can be well approximated by a schedule that is linearly increasing in income up to a threshold and constant afterwards. So although the full optimum could lead to complicated non-linear schedules in theory, very simple instruments can replicate it fairly well. The welfare gains from income-contingent repayment are significant.

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  • Findeisen, Sebastian & Sachs, Dominik, 2016. "Education and optimal dynamic taxation: The role of income-contingent student loans," Journal of Public Economics, Elsevier, vol. 138(C), pages 1-21.
  • Handle: RePEc:eee:pubeco:v:138:y:2016:i:c:p:1-21
    DOI: 10.1016/j.jpubeco.2016.03.009
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    Cited by:

    1. Katharine G. Abraham & Emel Filiz-Ozbay & Erkut Y. Ozbay & Lesley J. Turner, 2018. "Framing Effects, Earnings Expectations, and the Design of Student Loan Repayment Schemes," NBER Working Papers 24484, National Bureau of Economic Research, Inc.
    2. Findeisen, Sebastian & Sachs, Dominik, 2017. "Redistribution and insurance with simple tax instruments," Journal of Public Economics, Elsevier, vol. 146(C), pages 58-78.
    3. Findeisen, Sebastian & Sachs, Dominik, 2014. "Efficient Labor and Capital Income Taxation over the Life Cycle," Working Papers 14-17, University of Mannheim, Department of Economics.
    4. Robert J. Gary-Bobo & Alain Trannoy, 2015. "Optimal student loans and graduate tax under moral hazard and adverse selection," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 546-576, September.
    5. Findeisen, Sebastian & Sachs, Dominik, 2015. "Designing efficient college and tax policies," Working Papers 15-09, University of Mannheim, Department of Economics.
    6. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L., 2017. "Optimal Progressivity with Age-Dependent Taxation," Staff Report 551, Federal Reserve Bank of Minneapolis.
    7. Winfried Koeniger & Julien Prat, 2018. "Human Capital and Optimal Redistribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 27, pages 1-26, January.
    8. Dan Anderberg & Claudia Cerrone, 2014. "Education, Disappointment and Optimal Policy," CESifo Working Paper Series 5141, CESifo Group Munich.
    9. Krueger, Dirk & Ludwig, Alexander, 2013. "On the Optimal Provision of Social Insurance," MEA discussion paper series 201302, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    10. 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.
    11. Alexander Ludwig & Dirk Krueger, 2010. "Optimal Progressive Taxation and Education Subsidies in a Model of Endogenous Human Capital Formation," 2010 Meeting Papers 388, Society for Economic Dynamics.
    12. Findeisen, Sebastian & Sachs, Dominik, 2016. "Education and optimal dynamic taxation: The role of income-contingent student loans," Journal of Public Economics, Elsevier, vol. 138(C), pages 1-21.
    13. OBARA, Takuya, 2018. "Optimal human capital policies under the endogenous choice of educational types," CCES Discussion Paper Series 66, Center for Research on Contemporary Economic Systems, Graduate School of Economics, Hitotsubashi University.
    14. Stefanie Stantcheva, 2015. "Optimal Income, Education, and Bequest Taxes in an Intergenerational Model," NBER Working Papers 21177, National Bureau of Economic Research, Inc.
    15. Stefanie Stantcheva, 2015. "Optimal Taxation and Human Capital Policies over the Life Cycle," NBER Working Papers 21207, National Bureau of Economic Research, Inc.
    16. Sachs, Dominik & Findeisen, Sebastian, 2014. "Designing Efficient Education and Tax Policies," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100504, Verein für Socialpolitik / German Economic Association.
    17. 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.
    18. Sachs, Dominik & Abbott, Brant, 2016. "Universal versus Targeted Preschools: An Optimal Tax Approach," Annual Conference 2016 (Augsburg): Demographic Change 145916, Verein für Socialpolitik / German Economic Association.
    19. 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.
    20. Sachs, Dominik & Findeisen, Sebastian, 2015. "Insurance and Redistribution with Simple Tax Instruments," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113099, Verein für Socialpolitik / German Economic Association.

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    Keywords

    Optimal taxation; Education; Education finance; Student loans;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • I21 - Health, Education, and Welfare - - Education - - - Analysis of Education

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