Optimal Taxation of Education with an Initial Endowment of Human Capital

29 Pages Posted: 14 Nov 2010

See all articles by Christoph Braun

Christoph Braun

University of Dortmund - Ruhr Graduate School in Economics

Date Written: October 1, 2010

Abstract

Bovenberg and Jacobs (2005) and Richter (2009) derive the education efficiency theorem: In a second-best optimum, the education decision is undistorted if the function expressing the stock of human capital features a constant elasticity with respect to education. I drop this assumption. The household inherits an initial stock of human capital, implying that the aforementioned elasticity is increasing. In a two-period Ramsey model of optimal taxation, I show that the education efficiency theorem does not hold. In a second-best optimum, the discounted marginal social return to education is smaller than the marginal social cost. The household overinvests in human capital relative to the first best. The government effectively subsidizes the return to education.

Keywords: Optimal Taxation, Human Capital

JEL Classification: H21, I28, J24

Suggested Citation

Braun, Christoph, Optimal Taxation of Education with an Initial Endowment of Human Capital (October 1, 2010). Ruhr Economic Paper No. 210, Available at SSRN: https://ssrn.com/abstract=1707996 or http://dx.doi.org/10.2139/ssrn.1707996

Christoph Braun (Contact Author)

University of Dortmund - Ruhr Graduate School in Economics ( email )

Dortmund, 44221
Germany

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