Efficient Tax Policy Ranks Education Higher than Saving

Wolfram Richter

No 2106, CESifo Working Paper Series from CESifo

Abstract: Assuming a two-period model with endogenous choices of labour, education, and saving, it is shown to be second-best efficient not to distort the choice of education. In general this implies distorting the saving decision. Hence a strict order of policy priority is derived. Efficient tax policy ranks investment in human capital higher than investment in nonhuman capital. The result assumes an isoelastic earnings function and holds else for arbitrary utility functions. Isoelasticity of earnings is justified with reference to the empirically well-founded power law of learning.

Keywords: endogenous choice of education; labour; and saving; efficient taxation of human and nonhuman capital investment; power law of learning (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (1)

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