DP3099 Redistribution and Education Subsidies are Siamese Twins

Author(s): A Lans Bovenberg, Bas Jacobs
Publication Date: December 2001
Keyword(s): education subsidies, human capital, progressive taxation
JEL(s): H20, H50, I20, J20
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3099

We develop a model of human capital formation with endogenous labour supply and heterogeneous agents to explore the optimal level of education subsidies along with the optimal progressive schedule of the labour income tax and optimal capital income taxes. Subsidies on education ensure efficiency in human capital accumulation, while taxes on skilled labour help to redistribute income towards the less able. We thus provide a rationale for the widely observed presence of education subsidies. The actually observed tax codes and level of education subsidies suggest that a large part of education subsidies can be justified on these grounds.