Are Education Subsidies an Efficient Redistributive Device?

Tinbergen Institute Working Paper No. 2003-024/3

37 Pages Posted: 13 May 2003

See all articles by Robert Dur

Robert Dur

Erasmus University Rotterdam (EUR) - Department of Economics; Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Coen N. Teulings

University of Amsterdam; University of Cambridge

Date Written: January 2003

Abstract

We argue that promoting education may be a means to reduce income equality. When workers of different skill levels are imperfect substitutes in production, an increase in the level of human capital in the economy reduces the return to education and, hence, pre-tax income inequality. The compression of pre-tax wages implies that a given inequality of after-tax incomes can be reached with a less progressive income tax. Optimal redistribution policy faces a trade-off between the distortionary effect of progressive income taxation and the distortions arising from education subsidies. The optimal level of education subsidies crucially depends on the extent to which education compresses the wage distribution, the distortionary effect of progressive income taxation, and the political desire to redistribute income. We discuss empirical evidence showing that the economy's average years of schooling has a strong effect on pre-tax income inequality. We compute for a number of OECD countries the level of education subsidies that could be justified on redistributive grounds. Our argument for education subsidies goes a long way towards explaining the actual pattern and level of education subsidies in OECD countries.

Keywords: income inequality, optimal taxation, education

JEL Classification: H21, H52, J24, J31

Suggested Citation

Dur, Robert and Teulings, Coen N., Are Education Subsidies an Efficient Redistributive Device? (January 2003). Tinbergen Institute Working Paper No. 2003-024/3, Available at SSRN: https://ssrn.com/abstract=392360 or http://dx.doi.org/10.2139/ssrn.392360

Robert Dur (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Economics ( email )

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Coen N. Teulings

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