A Theory of Perverse Redistribution in Higher Education and Income Tax Progressivity in Europe

This paper studies the effect of income tax progressivity on the disproportionate use of publicly funded higher education. Relying on recent trends among European countries, we build a theoretical model which illustrates that more progressive tax systems increase low-income households' net fiscal benefit of higher education, making their children more likely to attend university. To increase the university enrollment of children from low-income households, the 'degree' of income tax progressivity must increase along the income distribution. 'Weakly progressive' tax systems -- defined as progressive tax systems where the 'degree' of tax progressivity at the bottom of the income distribution is higher than at the top -- can result in a 'perverse redistribution' equilibrium, in which poorer households pay taxes but are unable to bear the additional cost of sending their children to higher education, thereby subsidizing the higher education for richer households through their taxes. We extend our model to accommodate commonly used financial support mechanisms without fundamentally changing the effect of tax progressivity on a household's choice to send a child into higher education.