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Are Education Subsidies an Efficient Redistributive Device?

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  • Robert A.J. Dur

    (Erasmus University Rotterdam)

  • Coen N. Teulings

Abstract

We argue that promoting education may be a means to reduceincome inequality. When workers of different skill levels areimperfect substitutes in production, an increase in the level ofhuman capital in the economy reduces the return to education.Hence, a given compression of after-tax incomes can be achievedat lower marginal tax rates. Optimal redistribution policy faces atrade-off between the distortions of taxes on effort and the distortionsof education subsidies on the investment in human capital.We discuss empirical evidence on three crucial elasticities. Ourargument explains the actual pattern of education subsidies inOECD countries quite well.However, there is an offsetting effect. When education andability are complements, high ability types take up more education.A subsidy to education will then favor these types. Wediscuss the condition for the net effect of education subsidies tobe progressive. The empirical evidence suggest that this conditionis critical for a simple education subsidy. We consider somemore elaborate schemes for education subsidies.This discussion paper has resulted in ch. 4 of 'Labor Market Institutions and Public Regulation' , pp. 123-61, (Jonas Agell, Michael Keen, Alfons Weichenrieder (eds.)), 2004, MIT Press, 228 p.

Suggested Citation

  • Robert A.J. Dur & Coen N. Teulings, 2003. "Are Education Subsidies an Efficient Redistributive Device?," Tinbergen Institute Discussion Papers 03-024/3, Tinbergen Institute, revised 19 Sep 2003.
  • Handle: RePEc:tin:wpaper:20030024
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    Cited by:

    1. Bas Jacobs, 2013. "Optimal redistributive tax and education policies in general equilibrium," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(2), pages 312-337, April.
    2. Salvatore Barbaro, 2004. "Tax Distortion, Countervailing Subsidies and Income Redistribution," Departmental Discussion Papers 121, University of Goettingen, Department of Economics.
    3. Ujjaini Mukhopadhyay, 2021. "Differential Education Subsidy Policy and Wage Inequality Between Skilled, Semi-skilled and Unskilled Labour: A General Equilibrium Approach," Review of Development and Change, , vol. 26(1), pages 40-62, June.
    4. Dur, Robert & Glazer, Amihai, 2008. "Subsidizing Enjoyable Education," Labour Economics, Elsevier, vol. 15(5), pages 1023-1039, October.
    5. von Greiff, Camilo, 2007. "Enrollment in higher education, ability and growth," Research Papers in Economics 2007:10, Stockholm University, Department of Economics.
    6. Chaitali Sinha, 2014. "Human Capital and Public Policy," South Asian Journal of Macroeconomics and Public Finance, , vol. 3(1), pages 79-125, June.

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    More about this item

    Keywords

    income inequality; optimal taxation; education.;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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