Designing efficient college and tax policies


Findeisen, Sebastian ; Sachs, Dominik


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URL: https://ub-madoc.bib.uni-mannheim.de/39005
URN: urn:nbn:de:bsz:180-madoc-390055
Document Type: Working paper
Year of publication: 2015
The title of a journal, publication series: Working Paper Series
Volume: 15-09
Place of publication: Mannheim
Publication language: English
Institution: School of Law and Economics > VWL, Makro- u. Entwicklungsökonomie (Juniorprofessur) (Findeisen 2014-)
MADOC publication series: Department of Economics > Working Paper Series
Subject: 330 Economics
Classification: JEL: H21 , H23 , I22 , I24 , I28,
Keywords (English): Optimal Taxation , College Subsidies , College Enrollment , Tax Reforms
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.

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