We examine the optimal tax and education policy in the case of a dual income tax. Incorporating an educational sector and endogenous capital taxation, we show that the results in Nielsen and Srensen’s study are vulnerable with respect to assumptions on the elasticity of unskilled labor supply. Tax progressivity results residually, whereas educational policy guarantees an optimal tax wedge on, but not necessarily efficiency in, educational investment. The less elastic are the unobservable educational investment and skilled labor (the latter relative to unskilled labor supply), and the more educational policy cares about the skilled labor supply, the more progressive the tax system will be. Education will be subsidized on a net basis if the complementarity effect on the skilled labor supply is strong and important; however, there is also an offsetting substitutability effect of the unskilled labor supply at play.

Additional Metadata
Keywords Optimal income taxation, human capital, tuition fees.
JEL Efficiency; Optimal Taxation (jel H21), Personal Income and Other Nonbusiness Taxes and Subsidies (jel H24), Government Policy (jel I28)
Persistent URL hdl.handle.net/1765/124525
Journal German Economic Review
Schindler, D.S. (2011). Tuition Fees and the Dual Income Tax – The Optimality of the Nordic Income Tax System Reconsidered. German Economic Review, 12, 59–84. Retrieved from http://hdl.handle.net/1765/124525