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Unequal wages for equal utilities

  • Helmuth Cremer

    ()

  • Pierre Pestieau
  • Maria Racionero

When educational policy is supplemented by a redistributive income tax, and when individualsdiffer in their ability to benefit from education, the optimal policy is typically rather regressive.Resources are concentrated on the most able individuals in order to get a "cake" as big aspossible to share among individuals through income taxation. In this paper we put forwardanother reason to push for regressive education. It is not linked to heterogeneity in innate ability to benefit from education but to pervasive non-convexities that arise in the optimal income tax problem when individual productivities are endogenous. For simplicity we assume a lineareducation technology and a given total education budget. To give the equal wage outcome thebest chance to emerge, we also assume that individuals have identical learning abilities.Nevertheless, it turns out that in the first-best wage inequality is always preferable to wageequality. Even more surprisingly, this conclusion remains valid in the second-best (unless adhoc restriction on the feasible degree of a wage differentiation are imposed). This is in spite ofthe fact that wage equalization would eliminate any need for distortionary income taxation.

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File URL: http://hdl.handle.net/10.1007/s10797-011-9163-2
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Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 18 (2011)
Issue (Month): 4 (August)
Pages: 383-398

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Handle: RePEc:kap:itaxpf:v:18:y:2011:i:4:p:383-398
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  1. Joseph E. Stiglitz, 1981. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
  2. James M. Poterba, 1996. "Government Intervention in the Markets for Education and Health Care: How and Why?," NBER Chapters, in: Individual and Social Responsibility: Child Care, Education, Medical Care, and Long-Term Care in America, pages 277-308 National Bureau of Economic Research, Inc.
  3. Ulph, David, 1977. "On the optimal distribution of income and educational expenditure," Journal of Public Economics, Elsevier, vol. 8(3), pages 341-356, December.
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  9. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
  10. 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.
  11. Alison L. Booth & Melvyn Coles, 2006. "A Microfoundation for Increasing Returns in Human Capital Accumulation and the Under-Participation Trap," CEPR Discussion Papers 543, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  12. Kenneth J. Arrow, 1971. "A Utilitarian Approach to the Concept of Equality in Public Expenditures," The Quarterly Journal of Economics, Oxford University Press, vol. 85(3), pages 409-415.
  13. Becker, Gary S, 1985. "Human Capital, Effort, and the Sexual Division of Labor," Journal of Labor Economics, University of Chicago Press, vol. 3(1), pages S33-58, January.
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  15. A. Lans Bovenberg & Bas Jacobs, 2005. "Redistribution and Education Subsidies are Siamese Twins," Tinbergen Institute Discussion Papers 05-036/3, Tinbergen Institute.
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