Financing education using optimal redistributive taxation

Abstract

In this article, the joint use of an income tax and public provision of education as instruments to achieve the government's distributional objectives is considered. Individuals differ in innate labour productivity and in aptitude to acquire skills through education. Actual labour productivity depends on both innate skill and the amount of education received. Using a generalized version of the Mirrlees tax problem that incorporates these features, qualitative properties of an optimal tax schedule are investigated.

Negative Marginal Tax Rates and Heterogeneity

“…6 As pointed out by a referee, the multidimensional construction typically implies g(α) = g(α) = 0. This is discussed in Brett andWeymark (2003), p.2565. where λ is the multiplier of the budget constraint, i.e. the marginal cost of public funds.…”

“…A similar shortcut has been used by Brett and Weymark (2003) in a continuum environment, while Beaudry, Blackorby, and Szalay (2006) tackles the full multidimensional issue in a model where there are a nite number of types.…”

A case for taxing education

“…1 When assessing the redistributive role of publicly provided education (as is often the case at the elementary, secondary, and post-secondary levels) or subsidized privately acquired education (more relevant at post secondary level), one has to take into account the existence of other redistributive fiscal instruments; notably, the labor income tax system. Indeed the optimal tax literature has examined the productivity enhancing role of education, alongside redistributive taxation in settings with informational asymmetries (see, e.g., Sheshinski (1971), Ulph (1977) and Tuomala (1986) for early contributions; and more recently, Boadway & Marchand (1995) and Brett & Weymark (2003)). These studies differ in the way the government role in the market has been modeled.…”

Wage Policies, Employment, and Redistributive Efficiency

“…For a given ability type , the unique interior best choice of a wage rate conditional on an amount of labour hours must satisfy the …rst and second-order conditions of the problem max w 0 v(w;`; ), being equations (19) and (21). Similarly, the unique interior best choice of an amount of labour hours conditional on a wage rate for a given ability type must satisfy the …rst and second-order conditions of the problem max` 0 v(w;`; ), being equations (20) and (23).…”

“…Let w 0 L , w 0 M , and w 0 H be the corresponding 'best'wage rates of the low type, the mimicker, and the high type. 19 Proposition 2a. Suppose w 0 M < minfw 0 L ; w 0 H g holds at the second-best optimum without minimum wages.…”