Optimal Taxation of Education with an Initial Endowment of Human Capital
Bovenberg and Jacobs (2005) and Richter (2009) derive the education efficiency theorem: In a second-best optimum, the education decision is undistorted if the function expressing the stock of human capital features a constant elasticity with respect to education. I drop this assumption. The household inherits an initial stock of human capital, implying that the aforementioned elasticity is increasing. In a two-period Ramsey model of optimal taxation, I show that the education efficiency theorem does not hold. In a second-best optimum, the discounted marginal social return to education is smaller than the marginal social cost. The household overinvests in human capital relative to the first best. The government effectively subsidizes the return to education.
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- Wolfram F. Richter & Christoph Braun, 2010.
"Efficient Subsidization of Human Capital Accumulation with Overlapping Generations and Endogenous Growth,"
CESifo Working Paper Series
2982, CESifo Group Munich.
- Richter, Wolfram F. & Braun, Christoph, 2009. "Efficient Subsidization of Human Capital Accumulation with Overlapping Generations and Endogenous Growth," IZA Discussion Papers 4629, Institute for the Study of Labor (IZA).
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