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Catalyzers for Social Insurance: Education Subsidies vs. Real Capital Taxation

Author

Listed:
  • Dirk Schindler

    (Department of Economics, University of Konstanz, Germany)

  • Hongyan Yang

    (Department of Economics, University of Konstanz, Germany)

Abstract

To analyze the optimal social insurance package, we set up a two-period life-cycle model with risky human capital investment, where the government has access to labor taxation, education subsidies and capital taxation. Social insurance is provided by redistributive labor taxation. Moreover, both education subsidies and capital taxation are used as catalyzers to facilitate social insurance by mitigating distortions from labor taxation. We derive a Ramsey-rule for the optimal combination of these two instruments. Relative to capital taxation, optimal education subsidies increase in their relative effectiveness to boost labor supply and in households' underinvestment into education, but they decrease in their relative net distortions. For their absolute levels, indirect complementarity effects, i.e., influencing the effectiveness of the other instrument, do matter. Generally, a decrease in capital taxes should go along with an increase in education subsidies.

Suggested Citation

  • Dirk Schindler & Hongyan Yang, 2010. "Catalyzers for Social Insurance: Education Subsidies vs. Real Capital Taxation," Working Paper Series of the Department of Economics, University of Konstanz 2010-05, Department of Economics, University of Konstanz.
    • Handle: RePEc:knz:dpteco:1005
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    File URL: http://www.uni-konstanz.de/FuF/wiwi/workingpaperseries/WP_SchindlerandYang-5-10.pdf
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    References listed on IDEAS

    as
    1. da Costa, Carlos E. & Maestri, Lucas J., 2007. "The risk properties of human capital and the design of government policies," European Economic Review, Elsevier, vol. 51(3), pages 695-713, April.
    2. Ignacio Palacios-Huerta, 2003. "An Empirical Analysis of the Risk Properties of Human Capital Returns," American Economic Review, American Economic Association, vol. 93(3), pages 948-964, June.
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    Cited by:

    1. Robin Boadway & Motohiro Sato, 2015. "Optimal Income Taxation with Risky Earnings: A Synthesis," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(6), pages 773-801, December.

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    More about this item

    Keywords

    Human Capital Investment; Education Subsidies; Capital Taxation; Risk; Social Insurance;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • I2 - Health, Education, and Welfare - - Education
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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