Optimal redistributive tax and education policies in general equilibrium

Abstract

This paper studies optimal linear and non-linear income taxes and education subsidies in two-type models with endogenous human capital formation, endogenous labor supply, and endogenous wage rates. Assuming constant human capital elasticities, human capital investment should be efficient under optimal linear policies, whether general equilibrium effects are present or not. Hence, education subsidies should not be used for distributional reasons. Due to general equilibrium effects, optimal linear income taxes may even become negative. Optimal non-linear policies exploit general equilibrium effects for redistribution. The high-skilled type optimally has a negative marginal income tax rate and a positive marginal education subsidy. The low-skilled type optimally faces a positive marginal income tax rate and a marginal tax on education. Simulations demonstrate that general equilibrium effects have only a modest effect on optimal non-linear policies.

Optimal Taxation of Human Capital and the Earnings Function

“…9 9 See, for example, Nielsen and Sørensen (1997), Brett and Weymark (2003), Wigger (2004), Jacobs (2005, 2007), Blumkin and Sadka (2008), Bohacek and Kapicka (2008), Richter (2009), Jacobs, Schindler, and Yang (Forthcoming), Jacobs and Schindler (2009), Jacobs and Bovenberg (2010), and others. Separability of human capital and labor in labor earnings is also adopted in classical papers on life‐cycle models with education; see, for example, Heckman (1976), Kotlikoff and Summers (1979), Eaton and Rosen (1980); or in modern articles on growth with endogenous human capital; see, for example, Jones, Manuelli, and Rossi (1993, 1997), Trostel (1993), Judd (1999), and Hendricks (1999). …”

Social Background, Education, and Inequality

“…Specifically, the framework is a standard two‐period overlapping generations model (without real capital) in which agents make educational choices as young, influencing their human capital and thus employment and wage options as old, along the lines in Eaton and Rosen (), Bovenberg and Jacobs (), Jacobs (), and many others . The human capital acquisition is formulated in a rather general way to accommodate the role of social background factors (parents' education) and allow for both private and public educational inputs, which may be substitutes or complements.…”

Demand for 'The 1%':Tax Incidence and Implications for Optimal Income Tax Rates

“…Another virtue of expressing optimal tax formulas in terms of readily interpretable parameters is that it helps us understand the underlying reasons for previous results from the (small) literature on how incidence considerations affect optimal income tax policy. For instance, Stern (1982), Stiglitz (1982), and Jacobs (2012) conclude that high income earners would optimally face a marginal subsidy (i.e. a negative marginal tax rate) in the presence of price effects.…”