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Optimal Linear Income Taxation and Education Subsidies under Skill-Biased Technical Change

Author

Listed:
  • Bas Jacobs

    (Erasmus University Rotterdam)

  • Uwe Thuemmel

    (University of Zurich)

Abstract

This paper studies how linear tax and education policy should optimally respond to skill-biased technical change (SBTC). SBTC affects optimal taxes and subsidies by changing i) direct distributional benefits, ii) indirect redistributional effects due to wage-(de)compression, and iii) education distortions. Analytically, the effect of SBTC on these three components is shown to be ambiguous. Simulations for the US economy demonstrate that SBTC makes the tax system more progressive, since SBTC raises the direct distributional benefits of income taxes, which more than offset their larger indirect distributional losses, and it increases education distortions. Also, SBTC lowers optimal education subsidies, since SBTC generates larger direct distributional losses of education subsidies, which more than offset their larger indirect distributional gains, and it exacerbates education distortions.

Suggested Citation

  • Bas Jacobs & Uwe Thuemmel, 2020. "Optimal Linear Income Taxation and Education Subsidies under Skill-Biased Technical Change," Tinbergen Institute Discussion Papers 20-085/VI, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20200085
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    2. Cui, Xiaoyong & Gong, Liutang & Li, Wenjian, 2021. "Supply-side optimal capital taxation with endogenous wage inequality," Journal of Public Economics, Elsevier, vol. 198(C).

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    More about this item

    Keywords

    Human capital; General equilibrium; Optimal taxation; Education subsidies; Technological change;
    All these keywords.

    JEL classification:

    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • I2 - Health, Education, and Welfare - - Education
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor

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