Designing Efficient College and Tax Policies

67 Pages Posted: 4 Sep 2015

See all articles by Sebastian Findeisen

Sebastian Findeisen

University of Zurich; IZA Institute of Labor Economics

Dominik Sachs

European University Institute; Centre for Economic Policy Research (CEPR)

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Abstract

The total social benefits of college education exceed the private benefits because the government receives a share of the monetary returns in the form of income taxes. We study the policy implications of this fiscal externality in an optimal dynamic tax framework. Using a variational approach we derive a formula for the revenue effect of an increase in college education subsidies and for the excess burden of income taxation caused by the college margin. We also show how the optimal nonlinear income tax problem is altered by the college margin.Our modeling assumptions are strongly guided by the recent structural labor literature on college education. The model incorporates multidimensional heterogeneity, idiosyncratic risk and borrowing constraints. The model matches key empirical results on college enrollment patterns, returns to education and enrollment elasticities. Quantitatively, we find that a marginal increase in college subsidies in the US is at least 70 percent self-financing through the net-present value increase in future tax revenue. When targeting this increase to children in the lowest parental income tercile, it is even up to 165 percent self-financing. The excess burden of income taxation is only slightly altered by the college margin and therefore the optimal Mirrleesian income tax schedule is barely affected as well, in particular if subsidies are set at their optimal level.

Keywords: optimal taxation, college subsidies, college enrollment, tax reforms

JEL Classification: H21, H23, I22, I24, I28

Suggested Citation

Findeisen, Sebastian and Sachs, Dominik, Designing Efficient College and Tax Policies. IZA Discussion Paper No. 9171, Available at SSRN: https://ssrn.com/abstract=2655120 or http://dx.doi.org/10.2139/ssrn.2655120

Sebastian Findeisen (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Dominik Sachs

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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