Ruhr Economic Papers
Ruhr Economic Papers #210
Optimal Taxation of Education with an Initial Endowment of Human Capital
by Christoph Braun
TU Dortmund, RGS Econ, 10/2010, 27 S./p., 8 Euro, ISBN 978-3-86788-241-5download
Bovenberg and Jacobs (2005) and Richter (2009) derive the education efficiency theorem: In a second-best optimum, the education decision is undistorted if the function expressing the stock of human capital features a constant elasticity with respect to education. I drop this assumption. The household inherits an initial stock of human capital, implying that the aforementioned elasticity is increasing. In a two-period Ramsey model of optimal taxation, I show that the education efficiency theorem does not hold. In a second-best optimum, the discounted marginal social return to education is smaller than the marginal social cost. The household overinvests in human capital relative to the first best. The government effectively subsidizes the return to education.
JEL-Classification: H21, I28, J24
Keywords: Optimal taxation, human capital