Optimal Taxation and the Skill Premium

27 Pages Posted: 26 Jan 2012

See all articles by Konstantinos Angelopoulos

Konstantinos Angelopoulos

Athens University of Economics and Business - Department of International and European Economic Studies

Jim Malley

University of Glasgow - Department of Economics

Apostolis Philippopoulos

Athens University of Economics and Business - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); University of Essex

Date Written: January 26, 2012

Abstract

The stylized facts suggest a negative relationship between tax progressivity and the skill premium from the early 1960s until the early 1990s, and a positive one thereafter. They also generally imply rising tax progressivity, except for the 1980s. In this paper, we ask whether optimal tax policy is consistent with these observations, taking into account the demographic and technological factors that have also affected the skill premium. To this end, we construct a dynamic general equilibrium model in which the skill premium and the progressivity of the tax system are endogenously determined, with the latter being optimally chosen by a benevolent government. We find that optimal policy delivers both a progressive tax system and model predictions which are generally consistent, except for the 1980s, with the stylized facts relating to the skill premium and progressivity. To capture the patterns in the data over the 1980s requires that we adopt a government policy which is biased towards the interests of skilled agents. Thus, in addition to demographic and technological factors, changes in the preferences of policy-makers appear to be a potentially important factor in determining the evolution of the observed skill premium.

Keywords: skill premium, optimal tax policy, government preferences

JEL Classification: E620, E650, J310

Suggested Citation

Angelopoulos, Konstantinos and Malley, Jim and Philippopoulos, Apostolis, Optimal Taxation and the Skill Premium (January 26, 2012). CESifo Working Paper Series No. 3706, Available at SSRN: https://ssrn.com/abstract=1992325 or http://dx.doi.org/10.2139/ssrn.1992325

Konstantinos Angelopoulos

Athens University of Economics and Business - Department of International and European Economic Studies ( email )

GR-10434 Athens
Greece

Jim Malley (Contact Author)

University of Glasgow - Department of Economics ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom
+44 141 330 4617 (Phone)
+44 141 330 4940 (Fax)

HOME PAGE: http://www.gla.ac.uk/economics/malley/

Apostolis Philippopoulos

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
GR-10434 Athens
Greece
+301 322 3187 (Phone)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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