Externalities Human Capital, and Education Policy

In this paper we discuss the interaction between optimal linear income taxation and education policy. Education is characterised as a mixed investment good: it has both private and public components and affects utility only indirectly via the wage rate. First, we show that, in order to boost the purchase of marketed education - thereby enjoying a larger public good effect and a stronger investment effect - the tax system loses progressivity with respect to the standard case. Second, we derive a sufficient condition for public provision of education, or alternatively, for price subsidisation, to be welfare-improving. We argue that the characterisation of education as an investment good generating positive esternalities does not make obvious that it should be object of a dedicated policy; indeed, it might suggest that the purchase of marketed education is supported by the income tax schedule alone. We also briefly spell out some implications of our analysis for the negative income tax schemes. JEL Classification: H42, I28;

Alessandro Balestrino, Alessandro Petretto, Externalities Human Capital, and Education Policy in "STUDI ECONOMICI " 70/2000, pp , DOI: