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Optimal linear income taxes and education subsidies under skill-biased technical change

Author

Listed:
  • Bas Jacobs

    (Vrije Universiteit Amsterdam
    Tinbergen Institute
    CESifo)

  • Uwe Thuemmel

    (University of Zurich
    CESifo)

Abstract

This paper studies how linear tax and education policy should optimally respond to skill-biased technical change (SBTC). SBTC affects optimal taxes and subsidies by changing (1) direct distributional benefits of each policy instrument, (2) indirect, general-equilibrium effects on wages, and (3) education distortions. Analytically, the effect of SBTC on these three components is shown to be ambiguous. In simulations for the US economy, SBTC makes the optimal tax system more progressive and lowers optimal education subsidies. This is because for both income taxes and education subsidies; their direct distributional effects become more important, which more than offsets the larger general-equilibrium effects and increased education distortions.

Suggested Citation

  • Bas Jacobs & Uwe Thuemmel, 2023. "Optimal linear income taxes and education subsidies under skill-biased technical change," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(6), pages 1529-1575, December.
    • Handle: RePEc:kap:itaxpf:v:30:y:2023:i:6:d:10.1007_s10797-022-09756-8
    DOI: 10.1007/s10797-022-09756-8
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    More about this item

    Keywords

    Human capital; General equilibrium; Optimal taxation; Education subsidies; Technological change;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • I2 - Health, Education, and Welfare - - Education
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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