Public Education and Economic Growth Under Progressive Taxation
This paper studies the general equilibrium implications of alternative tax systems. In doing so, it extends the work of Glomm-Ravikumar (1992). In particular, we study two systems called proportional taxation (PP) and progressive taxation (PG). Under both systems, the economy-wide human capital stock generates positive externalities for each individual. In addition, there is active social education policy in the form of tax-transfers that can augment the economy-wide human capital stock and policy is chosen by a centralized fiscal authority. The basic result is that multiple equilibrium tax vectors exist under progressive taxation, while this is not true under proportional taxation. Also, numerical simulations show that a system characterized by high progressive and low proportional taxes is welfare superior to one of high proportional and low progressive taxation. This is even if tax-transfers are distorting.