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Does the Tax System Encourage too much Education?

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  • Annette Alstadsæter

Abstract

This paper provides an efficiency argument in favour of progressive labour income taxation. When the consumer faces a trade-off between investments in financial and human capital, a proportional comprehensive income tax tends to discriminate in favour of human capital investments. This effect is strengthened when education no longer is a pure investment, but also holds a direct consumption value. A comprehensive proportional income tax works as a tax subsidy on human capital investments, and it reduces the price of education as a consumption good. By introducing a progressive labour income tax, the efficiency distortion in the capital market may be partly neutralised.

Suggested Citation

  • Annette Alstadsæter, 2001. "Does the Tax System Encourage too much Education?," CESifo Working Paper Series 612, CESifo.
    • Handle: RePEc:ces:ceswps:_612
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    File URL: https://www.cesifo.org/DocDL/cesifo_wp612.pdf
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    References listed on IDEAS

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    1. Peter Gottschalk, 1997. "Inequality, Income Growth, and Mobility: The Basic Facts," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 21-40, Spring.
    2. Judd, Kenneth L, 1998. "Taxes, Uncertainty, and Human Capital," American Economic Review, American Economic Association, vol. 88(2), pages 289-292, May.
    3. Sandmo, Agnar, 1979. "A note on the neutrality of the cash flow corporation tax," Economics Letters, Elsevier, vol. 4(2), pages 173-176.
    4. Heckman, James J, 1976. "A Life-Cycle Model of Earnings, Learning, and Consumption," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 11-44, August.
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    Cited by:

    1. Lari Arthur Viianto, 2010. "The effects of the tax system on education decisions and welfare," Working Papers. Serie AD 2010-11, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

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