Education and Optimal Dynamic Taxation: The Role of Income-Contingent Student Loans

54 Pages Posted: 9 Nov 2011 Last revised: 25 Sep 2012

See all articles by Sebastian Findeisen

Sebastian Findeisen

University of Zurich; IZA Institute of Labor Economics

Dominik Sachs

European University Institute; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: September 20, 2012


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 combined with 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.

Keywords: Optimal dynamic taxation, education, implementation

JEL Classification: H21, H23, I21

Suggested Citation

Findeisen, Sebastian and Sachs, Dominik, Education and Optimal Dynamic Taxation: The Role of Income-Contingent Student Loans (September 20, 2012). Available at SSRN: or

Sebastian Findeisen (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072

Dominik Sachs

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

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