Optimal linear income taxes and education subsidies under skill-biased technical change

Bas Jacobs () and Uwe Thuemmel ()
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Bas Jacobs: Vrije Universiteit Amsterdam
Uwe Thuemmel: University of Zurich

International Tax and Public Finance, 2023, vol. 30, issue 6, No 4, 1529-1575

Abstract: Abstract This paper studies how linear tax and education policy should optimally respond to skill-biased technical change (SBTC). SBTC affects optimal taxes and subsidies by changing (1) direct distributional benefits of each policy instrument, (2) indirect, general-equilibrium effects on wages, and (3) education distortions. Analytically, the effect of SBTC on these three components is shown to be ambiguous. In simulations for the US economy, SBTC makes the optimal tax system more progressive and lowers optimal education subsidies. This is because for both income taxes and education subsidies; their direct distributional effects become more important, which more than offsets the larger general-equilibrium effects and increased education distortions.

Keywords: Human capital; General equilibrium; Optimal taxation; Education subsidies; Technological change (search for similar items in EconPapers)
JEL-codes: H2 H5 I2 J2 O3 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10797-022-09756-8

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