International Tax and Public Finance

, Volume 20, Issue 2, pp 312-337

First online:

Open Access This content is freely available online to anyone, anywhere at any time.

Optimal redistributive tax and education policies in general equilibrium

  • Bas JacobsAffiliated withDepartment of Economics, Erasmus School of Economics, Erasmus University RotterdamTinbergen InstituteNetsparCESifo Email author 


This paper studies optimal linear and non-linear income taxes and education subsidies in two-type models with endogenous human capital formation, endogenous labor supply, and endogenous wage rates. Assuming constant human capital elasticities, human capital investment should be efficient under optimal linear policies, whether general equilibrium effects are present or not. Hence, education subsidies should not be used for distributional reasons. Due to general equilibrium effects, optimal linear income taxes may even become negative. Optimal non-linear policies exploit general equilibrium effects for redistribution. The high-skilled type optimally has a negative marginal income tax rate and a positive marginal education subsidy. The low-skilled type optimally faces a positive marginal income tax rate and a marginal tax on education. Simulations demonstrate that general equilibrium effects have only a modest effect on optimal non-linear policies.


Human capital General equilibrium Optimal taxation Education subsidies

JEL Classification

H2 H5 I2 J2