On the Optimal Provision of Social Insurance: Progressive Taxation versus Education Subsidies in General Equilibrium

Dirk Krueger and Alexander Ludwig

No 10806, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper we compute the optimal tax and education policy transition in an economy where progressive taxes provide social insurance against idiosyncratic wage risk, but distort the education decision of households. Optimally chosen tertiary education subsidies mitigate these distortions. We highlight the quantitative importance of general equilibrium feedback effects from policies to relative wages of skilled and unskilled workers: subsidizing higher education increases the share of workers with a college degree thereby reducing the college wage premium which has important redistributive benefits. We also argue that a full characterization of the transition path is crucial for policy evaluation. We find that optimal education policies are always characterized by generous tuition subsidies, but the optimal degree of income tax progressivity depends crucially on whether transitional costs of policies are explicitly taken into account and how strongly the college premium responds to policy changes in general equilibrium.

Keywords: Education subsidy; Progressive taxation; Transitional dynamics (search for similar items in EconPapers)
JEL-codes: E62 H21 H24 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-dge, nep-edu, nep-ias, nep-lma, nep-mac and nep-pbe
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: On the optimal provision of social insurance: Progressive taxation versus education subsidies in general equilibrium (2016)
Working Paper: On the Optimal Provision of Social Insurance: Progressive Taxation versus Education Subsidies in General Equilibrium (2015)
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