2017-08 , Center for Research on Contemporary Economic Systems, Graduate School of Economics, Hitotsubashi University
This study examines optimal human capital policies under non-linear labor and capital income taxes in the presence of consumption value of education in a two-period setting. We show that when individuals can choose educational types differing by the relative importance of consumption value and production value, education subsidies for low-type individuals should not equal an efficient level that offsets distortions induced by non-linear taxes on labor and capital income. Our findings imply that education policy does not restore efficiency, or the Diamond-Mirrlees production efficiency theorem fails. Moreover, capital income taxation is optimal, which means that the Atkinson-Stiglitz theorem breaks down.