Catalyzers for Social Insurance: Education Subsidies vs. Real Capital Taxation

Dirk Schindler and Hongyan Yang ()
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Hongyan Yang: Department of Economics, University of Konstanz, Germany

No 2010-05, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: To analyze the optimal social insurance package, we set up a two-period life-cycle model with risky human capital investment, where the government has access to labor taxation, education subsidies and capital taxation. Social insurance is provided by redistributive labor taxation. Moreover, both education subsidies and capital taxation are used as catalyzers to facilitate social insurance by mitigating distortions from labor taxation. We derive a Ramsey-rule for the optimal combination of these two instruments. Relative to capital taxation, optimal education subsidies increase in their relative effectiveness to boost labor supply and in households' underinvestment into education, but they decrease in their relative net distortions. For their absolute levels, indirect complementarity effects, i.e., influencing the effectiveness of the other instrument, do matter. Generally, a decrease in capital taxes should go along with an increase in education subsidies.

Keywords: Human Capital Investment; Education Subsidies; Capital Taxation; Risk; Social Insurance (search for similar items in EconPapers)
JEL-codes: D80 H21 I2 J2 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2010-09-30
New Economics Papers: this item is included in nep-dge, nep-hrm, nep-ias and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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