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Title:Catalysts for social insurance: Education subsidies vs. real capital taxation PDF Logo
Authors:Schindler, Dirk
Yang, Hongyan
Issue Date:2010
Series/Report no.:CESifo working paper: Public Finance 3278
Abstract:To analyze the optimal social insurance package, we set up a two-period life-cycle model with risky human capital investment in which the government has access to labor taxation, education subsidies and capital taxation. Social insurance is provided by redistributive labor taxation. Moreover, both education subsidies and capital taxation are used as catalysts to facilitate social insurance by mitigating distortions from labor taxation. We derive a Ramsey-rule for the optimal combination of these two instruments. Relative to capital taxation, optimal education subsidies increase with their relative effectiveness to boost labor supply and with households' underinvestment into education, but they decrease with their relative net distortions. For the optimal absolute levels, indirect complementarity effects (i.e., influencing the effectiveness of the other instrument) do matter. Generally, a decrease in capital taxes should be accompanied by an increase in education subsidies.
Subjects:human capital investment
education subsidies
capital taxation
social insurance
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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