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Alternative tax constitutions and risky education in a federation

  • Poutvaara, Panu

I analyze a two-period model in which risk-averse students divide their time between risky education, leisure, and work. The educated can migrate. Wage-tax financed transfer to students acts as an insurance, and increases both human capital investment and demand for leisure. I derive sufficient conditions for tax competition to lead to inefficiently low wage tax rates. I suggest that the educated should pay their wage taxes to the region which has financed their education. I show that this would increase taxation and human capital investment, and would also benefit the owners of the complementary factor.

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Article provided by Elsevier in its journal Regional Science and Urban Economics.

Volume (Year): 31 (2001)
Issue (Month): 2-3 (April)
Pages: 355-377

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Handle: RePEc:eee:regeco:v:31:y:2001:i:2-3:p:355-377
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  1. David E. Wildasin, 2000. "Labor-Market Integration, Investment in Risky Human Capital, and Fiscal Competition," American Economic Review, American Economic Association, vol. 90(1), pages 73-95, March.
  2. Jonathan Eaton & Harvey Rosen, 1979. "Taxation, Human Capital and Uncertainty," Working Papers 497, Princeton University, Department of Economics, Industrial Relations Section..
  3. Panu Poutvaara & Vesa Kanniainen, 2000. "Why Invest in Your Neighbor? Social Contract on Educational Investment," International Tax and Public Finance, Springer, vol. 7(4), pages 547-562, August.
  4. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-74, September.
  5. Sinn, Hans-Werner, 1997. "The selection principle and market failure in systems competition," Munich Reprints in Economics 19854, University of Munich, Department of Economics.
  6. Panu Poutvaara, 2000. "Education, Mobility of Labour and Tax Competition," International Tax and Public Finance, Springer, vol. 7(6), pages 699-719, December.
  7. James R. Hines Jr (ed.), 0. "Tax Competition," Books, Edward Elgar, number 14897, March.
  8. Wildasin, David E, 1992. "Relaxation of Barriers to Factor Mobility and Income Redistribution," Public Finance = Finances publiques, , vol. 47(Supplemen), pages 216-30.
  9. Hamilton, Jonathan H, 1987. "Optimal Wage and Income Taxation with Wage Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 373-88, June.
  10. Wildasin, David E, 1995. " Factor Mobility, Risk and Redistribution in the Welfare State," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 527-46, December.
  11. Dixit, Avinash K & Sandmo, Angar, 1977. " Some Simplified Formulae for Optimal Income Taxation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(4), pages 417-23.
  12. David E. WILDASIN, 1997. "Income Distribution and Redistribution Within Federations," Annals of Economics and Statistics, GENES, issue 45, pages 291-313.
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