series: TI 01-090/3
Education and Efficient Redistribution
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Should education be subsidized for the purpose of redistribution? The usual argument against subsidies to education above the primary level is that the rich take up most education, so a subsidy would increase inequality. We show that there is a counteracting effect: an increase in the stock of human capital reduces the return to human capital and, therefore, pre-tax income inequality decreases. We consider a Walrasian world with perfect capital and insurance markets. Hence, in the absence of a strive for redistribution, the market generates the efficient level of investment in human capital. When there is a demand for redistribution, the general equilibrium effects on relative wages might make a subsidy to education an ingredient of a second-best optimal redistribution policy. Stimulating human capital formation results in a compression of the wage distribution, and hence reduces the need for distortionary redistributive taxation. We also study the political viability of education subsidies.
- H52 : Government Expenditures and Education
- H21 : Efficiency; Optimal Taxation
- J24 : Human Capital; Skills; Occupational Choice; Labor Productivity
- J31 : Wage Level and Structure; Wage Differentials by Skill, Training, Occupation, etc.
- education subsidies
- income policy