Income taxes, subsidies to education, and investments in human capital

Arbeitspapier

We study a two-sector economy with investments in human and physical capital and imperfect labor markets. Human and physical capital are heterogeneous. Workers and firms endogenously select the sector they are active in and choose the amount of their sector-specific investments. To enter the high-skill sector, workers must pay a fixed cost that we interpret as a direct cost of education. Given the distribution of the agents across sectors, at equilibrium, in each sector there is underinvestment in both human and physical capital, due to non-contractibility of investments. A second source of inefficiency is related to the self-selection of the agents into the two sectors: typically too many workers invest in education. Under suitable restrictions on the parameters, the joint effect of the two distortions is that equilibria are characterized by too many people investing too little effort in the high skill sector. We also analyze the welfare properties of equilibria and study the effects of several tax policies on the total expected surplus. In particular, consider the equilibrium associated with a flat labor income tax. Under suitable restrictions on the parameters, a revenue neutral progressive change in the marginal tax rates is welfare improving.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IAB-Discussion Paper ; No. 7/2011

Classification and Topics

• Classification: Wirtschaft ; Human Capital; Skills; Occupational Choice; Labor Productivity
• Subject: Human capital ; Efficiency ; Labour income tax ; Bildungsinvestition ; Investition ; Mehr-Sektoren-Modell ; Allokationseffizienz ; Einkommensteuer ; Steuerwirkung ; Wohlfahrtseffekt ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Mendolicchio, Concetta ; Paolini, Dimitri ; Pietra, Tito
• Event: Veröffentlichung
• (who): Institut für Arbeitsmarkt- und Berufsforschung (IAB)
• (where): Nürnberg
• (when): 2011

Further information

• Handle: http://hdl.handle.net/10419/57440
• Last update: 10.03.2025, 11:43 AM CET