Education, Wage Uncertainty and the 'Flat Tax Debate'

Educational risk and wage uncertainty are important features in human capital investment. Therefore, we apply an OLG-model, wherein human capital formation is exposed to idiosyncratic risk. Extending the instruments available for social insurance, a (Norwegian-type) two-bracket progressive labor tax system and education subsidies are shown to enhance the efficiency-insurance trade-off and to increase social welfare compared to a standard Eaton-Rosen-world. Progression is a superior instrument for insurance, and education subsidies are desirable to alleviate efficiency losses. Finally, we link our results to the flat tax debate. Direct tax progression becomes the more likely the more welfare costs are caused by income risk, the less elastic is labor supply and the more education is boosted by education subsidies. JEL Klassifikation : H21, I2, J2 Schlüsselwörter : progressive labor taxation, human capital investment, education subsidies, idiosyncratic risk Download/Reference : http://www.wiwi.uni-konstanz.de/forschergruppewiwi/ Hongyan Yang University of Konstanz Faculty of Economics Fach 133 78457 Konstanz Germany mail: [email protected] phone: +49-7531-88 3767 fax: +49-7531-884101 Dirk Schindler University of Konstanz Faculty of Economics Fach 133 78457 Konstanz Germany mail: [email protected] phone: +49-7531-883691 fax: +49-7531-884101 Education, Wage Uncertainty and the ‘Flat Tax Debate’ ∗ Dirk Schindler University of Konstanz and CESifo Hongyan Yang University of Konstanz†