Efficient progressivity when an education system sustains long-run growth

Abstract

Can an e¤ective education system substitute a redistributive policy, if the sys- tem also promotes e¢ ciency with equity to foster long-run growth? The question seems relevant for contemporary politics. Yet few have addressed it. Therefore, we reexamine the e¢ ciency of redistribution with a progressive income tax or edu- cation nance, adding to the seminal work of Benabou (2002), by considering the impact of knowledge externality, from the atmospheric presence of the education system, on private returns to schooling. Under the popular income tax scheme, the e¢ cient progressivity that maximizes the long-run growth rate of per capita in- come typically varies in an inverted U-shape if the endogenous growth comes from a greater share of knowledge externality vis-à-vis the elasticity of private expenditure in education. Under both schemes, e¢ cient progressivity turns from positive to zero as the education system s e¤ectiveness in knowledge gathering from contemporary educators exceeds a threshold which, however, decreases as the relative contribu- tion of knowledge externality to endogenous growth increases. Numerically, we nd that, for the baseline US economy, the e¢ cient progressivity turns out to be zero under the income tax scheme without an education subsidy and about 37.5% un- der a consumption tax-based education nance scheme with a progressive education subsidy, coupled with instruments to o¤set the distortionary impact of progressivity on saving.