Optimal Progressive Labor Income Taxation and Education Subsidies When Education Decisions and Intergenerational Transfers are Endogenous

摘要

We quantitatively characterize the optimal mix of progressive income taxes and education subsidies in a large-scale overlapping generations model with endogenous human capital formation, borrowing constraints, income risk, intergenerational transmission of wealth and ability, and incomplete financial markets. Progressive labor income taxes provide social insurance against idiosyncratic income risk and redistribute after-tax income among ex ante heterogeneous households. Furthermore, in addition to the standard distortions of labor supply progressive labor income taxes also reduce the incentives to acquire higher education, generating a nontrivial quantitative trade-off for the benevolent utilitarian government. The latter distortion can potentially be mitigated by an education subsidy which then becomes part of the optimal fiscal constitution.