We develop a model of human capital formation with endogenous labor supply and heterogeneous agents to explore the optimal level of education subsidies along with the optimal progressive schedule of the labor income tax and optimal capital income taxes. Subsidies on education ensure efficiency in human capital accumulation, while taxes on skilled labor 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.

Environmental quality and pollution-augmenting technological change in a two-sector endogenous growth model Bovenberg, A.L.; Smulders, J.A.