Education and optimal dynamic taxation: The role of income-contingent student loans

Sebastian Findeisen and Dominik Sachs

No 40, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: We study Pareto optimal tax and education policies when human capital upon labor market entry is endogenous and individuals face wage uncertainty. Though optimal labor distortions are history-dependent, i.e. depend on income and education, simple policy instruments can yield the desired distortions: a single nonlinear labor income tax schedule combined with income-contingent loans. To take themodel to the (US) data, we simplify the model to a binary education decision (graduating from college or not). We find that for lowand intermediate incomes the labor supply decision of college graduates should be distorted more heavily than for individuals without a college degree. As a consequence, the optimal student loan repayment schedule increases in income for this range. This result holds along the Pareto frontier. We compare the second best to a situation where loan repayment is restricted to be independent from income and find significant welfare gains.

Keywords: Optimal dynamic taxation; education; implementation (search for similar items in EconPapers)
JEL-codes: H21 H23 I21 (search for similar items in EconPapers)
Date: 2011-10, Revised 2012-09
New Economics Papers: this item is included in nep-dge and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

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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 (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:040

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