Optimal taxation with externalities of consumption and education spending

We investigate optimal taxation when a person’s utility decreases in others’ consumption and school quality increases in others’ education spending. Education externalities reduce education spending and schooling time from optimal levels, whereas consumption externalities cause high consumption relative to leisure and public goods. Internalizing education externalities supports education subsidies but opposite taxes on consumption and labour income. Internalizing consumption externalities supports consumption taxes but equal rates of labour income taxes and education subsidies. Internalizing both externalities justifies higher education subsidies than labour income taxes and positive taxes on labour income and consumption. We also investigate quantitative implications for tax reform and government debt sustainability.

Financing College Opportunity

Some states invest relatively heavily in financial aid programs that benefit lower-income citizens, while other states concentrate their investment in programs that benefit students from higher-income backgrounds. States also vary in their levels of direct appropriations to campuses, a form of public subsidy that has long been viewed as benefitting middle-income citizens. What factors influence states to allocate higher education subsidies in a more or a less redistributive manner? This article reports on a study that examined sources of variation in state spending on need-based aid, merit-based aid, and appropriations over the period 1990–2010. Findings document relationships among spending patterns and structural and political conditions of states, indicating a “trade-off” between spending on merit- and need-based aid; as states invest more in the former, they reduce spending on the latter. We also show that the presence of a Republican governor and the strength of Republican representation in statehouses each is associated with increased state spending on need-based financial aid. Our results further show that increased wealth is positively associated with state spending on merit-based financial aid programs and state appropriations for higher education, but not need-based financial aid. We also find distinctive patterns of state support for higher education depending on the degree of centralization of a state’s governance arrangement for higher education; namely, the presence of a highly centralized structure is associated with decreased spending on merit-based aid programs and increased state appropriations to colleges and universities.

Are Public Subsidies to Higher Education Regressive?

This article estimates the dollar amount of public higher education subsidies received by U.S. youth and examines the distribution of subsidies and the taxes that finance them across parental and student income levels. Although youths from high-income families obtain more benefit from higher education subsidies, highincome households pay sufficiently more in taxes that the net effect of the spending and associated taxation is distributionally neutral or mildly progressive. These results are robust to alternative assumptions and are consistent with Hansen and Weisbrod's earlier celebrated findings for California, although not with the conclusions often drawn from those findings.