Catalysts for Social Insurance: Education Subsidies vs. Real Capital Taxation
To analyze the optimal social insurance package, we set up a two-period life-cycle model with risky human capital investment in which the government has access to labor taxation, education subsidies and capital taxation. Social insurance is provided by redistributive labor taxation. Moreover, both education subsidies and capital taxation are used as catalysts to facilitate social insurance by mitigating distortions from labor taxation. We derive a Ramsey-rule for the optimal combination of these two instruments. Relative to capital taxation, optimal education subsidies increase with their relative effectiveness to boost labor supply and with households’ underinvestment into education, but they decrease with their relative net distortions. For the optimal absolute levels, indirect complementarity effects (i.e., influencing the effectiveness of the other instrument) do matter. Generally, a decrease in capital taxes should be accompanied by an increase in education subsidies.
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- Ignacio Palacios-Huerta, 2003.
"An Empirical Analysis of the Risk Properties of Human Capital Returns,"
American Economic Review,
American Economic Association, vol. 93(3), pages 948-964, June.
- Ignacio Palacios-Huerta, 2001. "An Empirical Analysis of the Risk Properties of Human Capital Returns," Working Papers 2001-10, Brown University, Department of Economics.
- Costa, Carlos Eugênio da & Maestri, Lucas Jóver, 2004.
"The risk-properties of human capital and the design of government policies,"
Economics Working Papers (Ensaios Economicos da EPGE)
554, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
- da Costa, Carlos E. & Maestri, Lucas J., 2007. "The risk properties of human capital and the design of government policies," European Economic Review, Elsevier, vol. 51(3), pages 695-713, April.
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