Investment in human capital: an optimal taxation approach

My thesis aims to bring four contributions to the existing literature. First, I introduce parental altruism toward children's education in the dynasty model with the un observable ability and labor e ort. I show that parents' altruism is relevant for normative inference. To this aim, I derive intuitions regarding the introduction of parental altruism toward children's human capital. I study parental altruism in two main workhorses in the literature: Ramsey setup and Mirrlees setup. I formulate and prove a proposition that altru istic parents work more than non-altruistic parents, even at higher income taxation levels. The introduction of altruistic parents changes the policy recommendation because the e - ciency gains from investment in human capital are di erent in the agent model than in the dynasty model. Second, I compare two main policy instruments of subsidizing investment in human capital in the literature: education subsidies (ES) and income-contingent loans (ICL). To this aim, I derive the human capital wedge for the dynamic Mirrlees model with altruistic dynasties and present the relation between the marginal tax on human capital ac cumulation and the wedge for human capital. The theoretical results are consistent with the literature, suggesting that human capital expenditures should be fully tax-deductible (see, i.e., Bovenberg and Jacobs, 2005; Stantcheva, 2015; Koeniger and Prat, 2018). Third, I build a full quantitative model to evaluate ES and ICL in my setup. My contribution to the existing literature is to provide a normative inference of ES and ICL with altruistic dynasties, unobservable heterogeneity and income uncertainty through the lens of an optimal taxation approach. I build on the strands of the literature: optimal taxation and human capital. My thesis analyzes the impact of the introduction of ICL and ES on social welfare and inequality. The existing literature analyzes one of these instruments, and never two of them together, what is considered in this thesis. My fourth contribution is the characterization of the social optimum. I study the properties of instruments in an economy with altruistic parents, heterogeneous unobservable innate abilities and income shocks. Further, I quantify the e ect of these model features on welfare and social inequality in a world with education subsidies and income-contingent loans relative to laissez-faire, thus reconciling at least part of the con- icting results in the existing literature. I compare the steady-state results of introducing the income-contingent loans and income-independent and income-dependent education subsidies relative to the current US economy.