Education and optimal dynamic taxation: The role of income-contingent student loans

Arbeitspapier

We study Pareto optimal tax and education policies when human capital upon labor market entry is endogenous and individuals face wage uncertainty. Though optimal labor distortions are history-dependent, i.e. depend on income and education, simple policy instruments can yield the desired distortions: a single nonlinear labor income tax schedule combinedwith income-contingent loans. To take themodel to the (US) data, we simplify the model to a binary education decision (graduating from college or not). We find that for lowand intermediate incomes the labor supply decision of college graduates should be distorted more heavily than for individuals without a college degree. As a consequence, the optimal student loan repayment schedule increases in income for this range. This result holds along the Pareto frontier. We compare the second best to a situation where loan repayment is restricted to be independent from income and find significant welfare gains.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 40

Classification and Topics

• Classification: Wirtschaft ; Taxation and Subsidies: Efficiency; Optimal Taxation ; Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies ; Analysis of Education
• Subject: Optimal dynamic taxation ; Education ; Implementation ; Bildungsverhalten ; Bildungsertrag ; Erwerbsverlauf ; Einkommensteuer ; Optimale Besteuerung ; Pareto-Optimum ; Allgemeines Gleichgewicht ; USA

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Findeisen, Sebastian ; Sachs, Dominik
• Event: Veröffentlichung
• (who): University of Zurich, Department of Economics
• (where): Zurich
• (when): 2012

Further information

• DOI: doi:10.5167/uzh-51544
• Handle: http://hdl.handle.net/10419/77557
• Last update: 10.03.2025, 11:41 AM CET