Optimal redistributive tax and education policies in general equilibrium

Bas Jacobs

International Tax and Public Finance, 2013, vol. 20, issue 2, 312-337

Abstract: This paper studies optimal linear and non-linear income taxes and education subsidies in two-type models with endogenous human capital formation, endogenous labor supply, and endogenous wage rates. Assuming constant human capital elasticities, human capital investment should be efficient under optimal linear policies, whether general equilibrium effects are present or not. Hence, education subsidies should not be used for distributional reasons. Due to general equilibrium effects, optimal linear income taxes may even become negative. Optimal non-linear policies exploit general equilibrium effects for redistribution. The high-skilled type optimally has a negative marginal income tax rate and a positive marginal education subsidy. The low-skilled type optimally faces a positive marginal income tax rate and a marginal tax on education. Simulations demonstrate that general equilibrium effects have only a modest effect on optimal non-linear policies. Copyright The Author(s) 2013

Keywords: Human capital; General equilibrium; Optimal taxation; Education subsidies; H2; H5; I2; J2 (search for similar items in EconPapers)
Date: 2013
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Working Paper: Optimal Redistributive Tax and Education Policies in General Equilibrium (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:kap:itaxpf:v:20:y:2013:i:2:p:312-337

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DOI: 10.1007/s10797-012-9229-9

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