Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26574
Authors: 
Jacobs, Bas
Schindler, Dirk
Yang, Hongyan
Year of Publication: 
2009
Series/Report no.: 
CESifo working paper 2529
Abstract: 
In a model with ex-ante homogenous households, earnings risk and a general earnings function, we derive the optimal linear labor tax rate and optimal linear education subsidies. The optimal income tax trades off social insurance against incentives to work and to invest in human capital. Education subsidies are not used for social insurance, but are only targeted at off-setting the distortions of the labor tax and internalizing a fiscal externality. Both optimal education subsidies and tax rates increase if labor and education are more complementary, since education subsidies indirectly lower labor tax distortions by stimulating labor supply. Optimal education subsidies (taxes) also correct non-tax distortions arising from missing insurance markets. Education subsidies internalize a positive (negative) fiscal externality if there is underinvestment (overinvestment) in education due to risk. Education policy unambiguously allows for more social insurance if education is a risky activity. However, if education hedges against labor market risk, optimal tax rates could be lower than without education subsidies.
Subjects: 
Labor taxation
human capital investment
education subsidies
idiosyncratic risk
risk properties of human capital
JEL: 
H21
I2
J2
Document Type: 
Working Paper

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