Whither the Progressive Tax?
CIRPEE Working Paper 13-40
45 Pages Posted: 6 Nov 2013
Date Written: November 5, 2013
The progressive wage tax is the instrument commonly used by democracies to fund public expenditures. Yet it still divides opinions about its impact on skill formation. We develop a general equilibrium model to analyze this impact, in the context of uncertain return on higher education. We show that the quantitative impact on skill formation of switching from the flat to the progressive tax varies with the level of efficiency with which higher education imparts graduates with suitable skills. This impact is negative when the level of efficiency of higher education is low and positive when it is high.
Keywords: Tax progressivity, higher education, skilled information, capital inflows, general equilibrium
JEL Classification: F21, F22, H20, J60
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