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Tax Distortion, Countervailing Subsidies and Income Redistribution

Author

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  • Salvatore Barbaro

    (University of Mainz)

Abstract
A persistent controversy in the economics of higher education is the distributional consequences of tuition-fee subsidies. There are two points at issue. First, subsidies affect income distribution between rich and poor households, analyzed by cross-sectional studies. Second, there may also be long-run effects on income distribution, i.e., toward graduates who benefited from public higher education and away from non-graduates who contributed their taxes to finance these subsidies. This paper focuses on whether it is in the interest of the non-graduates to subsidize investments in higher education. We show that subsidies to higher education may be Pareto-superior, benefiting all agents rather than the minority of graduates alone. However, it is also likely that eficiency gains cannot be distributed among all agents if a large fraction of agents uses subsidies to reap windfall gains. Windfall gains occur because of the unavailability of agents\' endowments and are identified as the main cause of unwanted distributional effects between graduates and non-graduates. Nevertheless, it would be possible to establish a voluntary graduate tax that works as a revelation mechanism and, consequently, breaks down the euity-efficiency trade-off.

Suggested Citation

  • Salvatore Barbaro, 2004. "Tax Distortion, Countervailing Subsidies and Income Redistribution," Departmental Discussion Papers 121, University of Goettingen, Department of Economics.
    • Handle: RePEc:got:vwldps:121
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    File URL: http://www2.vwl.wiso.uni-goettingen.de/departmentpaper/NO_121.pdf
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    2. Sascha Wolff, 2006. "Migration und ihre Determinanten im ost-westdeutschen Kontext nach der Wiedervereinigung: Ein Literaturüberblick," Departmental Discussion Papers 130, University of Goettingen, Department of Economics.
    3. Petra Enß & Robert Schwager, 2006. "Kommunaler Finanzausgleich und Gewerbesteuerhebesätze in Niedersachsen," Departmental Discussion Papers 127, University of Goettingen, Department of Economics.
    4. Gianni De Fraja, 2004. "Education and Redistribution," Rivista di Politica Economica, SIPI Spa, vol. 94(3), pages 3-44, May-June.
    5. Renate Ohr, 2009. "European Monetary Union at Ten: Had the German Maastricht Critics Been Wrong?," Departmental Discussion Papers 141, University of Goettingen, Department of Economics.

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    More about this item

    Keywords

    tax distortion; voluntary graduate tax; income redistribution;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid

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