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Human capital formation and general equilibrium treatment effects: a study of tax and tuition policy

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  • James Heckman
  • Lance Lockner
  • Christopher Taber

Abstract

Policies to promote human capital formation have been advocated as a remedy for reducing the economy-wide problem of rising wage inequality. These policies are national in character and are designed to substantially alter the proportion of the work-force that is skilled. Yet the methods used to evaluate these policies are partial equilibrium in nature and do not take account of the consequences of the changes in skill prices that are produced by the policies. This paper summarises our research on general equilibrium evaluation of tuition and tax policies. We compare estimates of policy impact from our approach with those obtained from conventional partial equilibrium ‘treatment effect’ approaches to policy evaluation, and find substantial differences. Conventional partial equilibrium approaches present an overly optimistic view of what tax and tuition policy can achieve because they ignore the change in human capital investment levels induced by the change in prices due to the policy. In addition, conventional partial equilibrium approaches fail to provide an accurate assessment of the welfare consequences of these policies.

Suggested Citation

  • James Heckman & Lance Lockner & Christopher Taber, 1999. "Human capital formation and general equilibrium treatment effects: a study of tax and tuition policy," Fiscal Studies, Institute for Fiscal Studies, vol. 20(1), pages 25-40, March.
  • Handle: RePEc:ifs:fistud:v:20:y:1999:i:1:p:25-40
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    File URL: http://www.ifs.org.uk/fs/articles/0018a.pdf
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    References listed on IDEAS

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    1. James Davies & John Whalley, 1991. "Taxes and Capital Formation: How Important is Human Capital?," NBER Chapters,in: National Saving and Economic Performance, pages 163-200 National Bureau of Economic Research, Inc.
    2. Trostel, Philip A, 1993. "The Effect of Taxation on Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 327-350, April.
    3. James J. Heckman & Edward J. Vytlacil, 2000. "Local Instrumental Variables," NBER Technical Working Papers 0252, National Bureau of Economic Research, Inc.
    4. Stephen V. Cameron & James J. Heckman, 1998. "Life Cycle Schooling and Dynamic Selection Bias: Models and Evidence for Five Cohorts," NBER Working Papers 6385, National Bureau of Economic Research, Inc.
    5. Heckman, James J, 1976. "A Life-Cycle Model of Earnings, Learning, and Consumption," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 11-44, August.
    6. B. Douglas Bernheim & John B. Shoven, 1991. "National Saving and Economic Performance," NBER Books, National Bureau of Economic Research, Inc, number bern91-2, April.
    7. James J. Heckman & Lance Lochner & Christopher Taber, 1999. "General Equilibrium Cost Benefit Analysis of Education and Tax Policies," NBER Working Papers 6881, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Mohsen BOUAISSA, "undated". "Human Capital Theory, Returns to Education and On-the-job Learning: Evidence from Canadian Data," EcoMod2009 21500017, EcoMod.
    2. Jan Boone & Ruud A. De Mooij, 2000. "Tax Policy in a Model of Search with Training," CESifo Working Paper Series 232, CESifo Group Munich.
    3. Loren Brandt & Aloysius Siow & Carl Vogel, 2009. "Large Demographic Shocks and Small Changes in the Marriage Market," CEPR Discussion Papers 615, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    4. Guido W. Imbens & Jeffrey M. Wooldridge, 2009. "Recent Developments in the Econometrics of Program Evaluation," Journal of Economic Literature, American Economic Association, vol. 47(1), pages 5-86, March.
    5. Abhijit V. Banerjee & Esther Duflo, 2009. "The Experimental Approach to Development Economics," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 151-178, May.
    6. Enrico Moretti, 2013. "Real Wage Inequality," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 65-103, January.
    7. Marcelin Joanis, 2002. "L'économie de l'éducation: méthodologies, constats et leçons," CIRANO Working Papers 2002s-70, CIRANO.
    8. repec:eee:poleco:v:48:y:2017:i:c:p:91-103 is not listed on IDEAS
    9. Alexander Ludwig & Dirk Krueger, 2015. "Optimal Capital and Progressive Labor Income Taxation with Endogenous Schooling Decisions and Intergenerational Transfers," 2015 Meeting Papers 334, Society for Economic Dynamics.
    10. Karlsson, Maria & Lundin, Mathias, 2016. "On statistical methods for labor market evaluation under interference between units," Working Paper Series 2016:24, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    11. Uli KLEINWECHTER, "undated". "A Utility Function Based Approach Towards the Modeling of Migration in Village Equilibrium Models," EcoMod2010 259600092, EcoMod.
    12. 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.
    13. 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.
    14. Mathias Lundin & Maria Karlsson, 2014. "Estimation of causal effects in observational studies with interference between units," Statistical Methods & Applications, Springer;Società Italiana di Statistica, vol. 23(3), pages 417-433, August.
    15. repec:mbr:jmonec:v:10:y:2015:i:1:p:23-63 is not listed on IDEAS
    16. George Economides & Apostolis Philippopoulos & Stelios Sakkas, 2016. "Tuition Fees, as User Prices, and Private Incentives," CESifo Working Paper Series 5991, CESifo Group Munich.
    17. Verbic, Miroslav & Majcen, Boris & Cok, Mitja, 2009. "Education and Economic Growth in Slovenia: A Dynamic General Equilibrium Approach with Endogenous Growth," MPRA Paper 17817, University Library of Munich, Germany.
    18. Yazid Dissou & Selma Didic, 2012. "Government spending on education, human capital accumulation, taxes and growth: a multisector dynamic general equilibrium analysis," EcoMod2012 4540, EcoMod.

    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • I2 - Health, Education, and Welfare - - Education

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