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.

Redistributive policies and technology diffusion

In this paper we examine the effects of redistributive policies in a transition economy in the presence of technology diffusion on labor and education decisions, and skill-premium. We set a micro-founded dynamic general equilibrium model with a skill-biased technology diffusion, elastic leisure/labor decisions, and investments in education. The economy is populated by two types of households – skilled and unskilled, which become skilled through investments in education. We highlight the importance of the general equilibrium effects of redistributive policies over the leisure/labor and education decisions and wages. Lump-sum transfers reduce investments in education, raising the share of unskilled individuals, decreasing their wage and, raising the skill-premium. Education subsidies raise investments in education, the skills supply, and unskilled wages and reduce the skill-premium during the slowdown of the technology diffusion.