Education and Optimal Dynamic Taxation: The Role of Income-Contingent Student Loans

Sebastian Findeisen and Dominik Sachs

No 10622, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study the optimal design of integrated education finance and tax systems. The distribution of wages is endogenously determined by the costly education decisions of heterogeneous individuals before labor market entry. Consistent with empirical evidence, this human capital investment decision is risky. We find that an integrated education and tax system in which the government provides education loans to young individuals coupled with income-contingent repayment can always be designed in a Pareto optimal way. We present a simple empirically driven application of the framework to US data in which individuals make a college entry decision. We find the optimal repayment schemes for college loans can be well approximated by a schedule that is linearly increasing in income up to a threshold and constant afterwards. So although the full optimum could lead to complicated non-linear schedules in theory, very simple instruments can replicate it fairly well. The welfare gains from income-contingent repayment are significant.

Keywords: Education; Education finance; Optimal taxation; Student loans (search for similar items in EconPapers)
JEL-codes: H21 H23 I21 (search for similar items in EconPapers)
Date: 2015-05
New Economics Papers: this item is included in nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://cepr.org/publications/DP10622 (application/pdf)

Related works:
Journal Article: Education and optimal dynamic taxation: The role of income-contingent student loans (2016)
Working Paper: Education and optimal dynamic taxation: The role of income-contingent student loans (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:10622

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP10622

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().