Abstract
This paper studies how linear tax and education policy should optimally respond to skill-biased technical change (SBTC). SBTC affects optimal taxes and subsidies by changing (1) direct distributional benefits of each policy instrument, (2) indirect, general-equilibrium effects on wages, and (3) education distortions. Analytically, the effect of SBTC on these three components is shown to be ambiguous. In simulations for the US economy, SBTC makes the optimal tax system more progressive and lowers optimal education subsidies. This is because for both income taxes and education subsidies; their direct distributional effects become more important, which more than offsets the larger general-equilibrium effects and increased education distortions.
| Original language | English |
|---|---|
| Pages (from-to) | 1529-1575 |
| Number of pages | 47 |
| Journal | International Tax and Public Finance |
| Volume | 30 |
| Issue number | 6 |
| Early online date | 6 Oct 2023 |
| DOIs | |
| Publication status | Published - Dec 2023 |
Bibliographical note
Publisher Copyright:© 2022, The Author(s).
Funding
The authors like to thank the editor Ron Davies, two anonymous referees, Bjoern Bruegemann, seminar participants of Erasmus University Rotterdam, and participants of the 2014 IIPF Conference in Lugano and the 2015 EEA Conference in Mannheim for useful comments and suggestions.
| Funders |
|---|
| Erasmus Universiteit Rotterdam |
UN SDGs
This output contributes to the following UN Sustainable Development Goals (SDGs)
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SDG 17 Partnerships for the Goals
Keywords
- Education subsidies
- General equilibrium
- Human capital
- Optimal taxation
- Technological change
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