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Optimal Combinations of Income Tax and Subsidies for Education




Nielsen and Sørensen (1997) find that progressive taxation of labour income is optimal when capital income is taxed. This paper shows that their main result still holds when introducing endogenous choice of occupation, individuals with non- pecuniary preferences for one type of occupation, and tuition fees into the model, provided the subsidy rate for tuition in the high skill occupation is not too low. However, a new result in this paper state that efficiency can be reached when labour income tax is proportional and capital income is taxed, provided that the rates of subsidies for tuition are lower than the labour income tax rate.

Suggested Citation

  • Geir Haakon Bjertnæs, 2001. "Optimal Combinations of Income Tax and Subsidies for Education," Discussion Papers 313, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:313

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    References listed on IDEAS

    1. Nerlove, Marc & Razin, Assaf & Sadka, Efraim & von Weizsacker, Robert K., 1993. "Comprehensive income taxation, investments in human and physical capital, and productivity," Journal of Public Economics, Elsevier, vol. 50(3), pages 397-406, March.
    2. Heckman, James J, 1976. "A Life-Cycle Model of Earnings, Learning, and Consumption," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 11-44, August.
    3. Driffill, E John & Rosen, Harvey S, 1983. "Taxation and Excess Burden: A Life Cycle Perspective," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 671-683, October.
    4. Nielsen, Soren Bo & Sorensen, Peter Birch, 1997. "On the optimality of the Nordic system of dual income taxation," Journal of Public Economics, Elsevier, vol. 63(3), pages 311-329, February.
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    Cited by:

    1. Geir Haakon Bjertnæs, 2005. "Income Taxation, Tuition Subsidies, and Choice of Occupation: Implications for Production Efficiency," CESifo Working Paper Series 1627, CESifo Group Munich.

    More about this item


    Optimal income taxation; Human capital investments; Subsidies for tuition; Skill formation;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies


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