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General Equilibrium Cost Benefit Analysis of Education and Tax Policies

Author

Listed:
  • James J. Heckman
  • Lance Lochner
  • Christopher Taber

Abstract

This paper formulates and estimates an open-economy overlapping generation general-equilibrium model of endogenous heterogeneous human capital in the form of schooling and on-the-job training. Physical capital accumulation is also analyzed. We use the model to explain rising wage inequality in the past two decades due to skill-biased technical change and to estimate investment responses. We compare an open economy version with a closed economy version. Using our empirically grounded general equilibrium model that explains rising wage inequality, we evaluate two policies often suggested as solutions to the problem of rising wage inequality: (a) tuition subsidies to promote skill formation and (b) tax policies. We establish that conventional partial equilibrium policy evaluation methods widely used in labor economics and public finance give substantially misleading estimates of the impact of national tax and tuition policies on skill formation. Conventional microeconomic methods for estimating the schooling response to tuition overestimate the response by an order of magnitude. Simulations of our model also reveal that move to a flat consumption tax raises capital accumulation and the real wages of all skill groups and barely affects overall measures of income inequality.

Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberwo:6881
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    File URL: http://www.nber.org/papers/w6881.pdf
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    Cited by:

    1. William R. Johnson, 2006. "Are Public Subsidies to Higher Education Regressive?," Education Finance and Policy, MIT Press, vol. 1(3), pages 288-315, June.
    2. Kirk A. Collins & James B. Davies, 2002. "Measuring Effective Tax Rates on Human Capital: The Canadian Case," University of Western Ontario, Economic Policy Research Institute Working Papers 20025, University of Western Ontario, Economic Policy Research Institute.
    3. Fehr, Hans, 1999. "Welfare Effects of Dynamic Tax Reforms," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 5, number urn:isbn:9783161470165, April.
    4. Raaum,O. & Aabo,T.E., 1999. "The effect of schooling on earnings : the role of family background studied by a large sample of Norwegian twins," Memorandum 16/1999, Oslo University, Department of Economics.
    5. Jonathan Pincus, 2000. "Do We Know Federal Treasury Overspends on Undergraduates?," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 7(3), pages 277-288.
    6. William R. Johnson, 2004. "When is the Efficient Subsidy to Higher Education the Equitable Subsidy ?," Virginia Economics Online Papers 366, University of Virginia, Department of Economics.
    7. Kirk A. Collins & James Davies, 2003. "Measuring Effective Tax Rates on Human Capital: Methodology and an Application to Canada," CESifo Working Paper Series 965, CESifo Group Munich.
    8. Oddbjørn Raaum & Tom Erik Aabø, 2000. "The Effect of Schooling on Earnings: Evidence on the role of family background from a large sample of Norwegian twins," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 26, pages 95-113.
    9. Tomas Philipson, 1999. "External Treatment Effects and Program Implementation Bias," Working Papers 9929, Harris School of Public Policy Studies, University of Chicago.
    10. Juan A. Rojas, 2004. "On the Interaction between Education and Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(4), pages 932-957, October.
    11. Kong Weng Ho & Hian Teck Hoon, 2003. "Service Links and Wage Inequality," Departmental Working Papers wp0301, National University of Singapore, Department of Economics.
    12. Annette Alstadsæter, 2011. "Measuring the Consumption Value of Higher Education," CESifo Economic Studies, CESifo, vol. 57(3), pages 458-479, September.
    13. Heckman, James J., 2001. "Econometrics and empirical economics," Journal of Econometrics, Elsevier, vol. 100(1), pages 3-5, January.
    14. Edwin Leuven & Hessel Oosterbeek & Bas van der Klaauw, 2010. "The Effect of Financial Rewards on Students' Achievement: Evidence from a Randomized Experiment," Journal of the European Economic Association, MIT Press, vol. 8(6), pages 1243-1265, December.
    15. Lorraine Dearden & Carl Emmerson & Christine Frayne & Costas Meghir, 2005. "Education subsidies and school drop-out rates," IFS Working Papers W05/11, Institute for Fiscal Studies.
    16. OBARA, Takuya, 2018. "Optimal human capital policies under the endogenous choice of educational types," CCES Discussion Paper Series 66, Center for Research on Contemporary Economic Systems, Graduate School of Economics, Hitotsubashi University.
    17. Cunha, Flavio & Heckman, James, 2008. "A New Framework For The Analysis Of Inequality," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S2), pages 315-354, September.
    18. Lutz Hendricks, 2001. "How Do Taxes Affect Human Capital? The Role of Intergenerational Mobility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(3), pages 695-735, July.
    19. Dur, Robert & Glazer, Amihai, 2008. "Subsidizing Enjoyable Education," Labour Economics, Elsevier, vol. 15(5), pages 1023-1039, October.
    20. 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.
    21. Lutz Hendricks, 2001. "How Do Taxes Affect Human Capital? The Role of Intergenerational Mobility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(3), pages 695-735, July.

    More about this item

    JEL classification:

    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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