Income Taxation, Tuition Subsidies, and Choice of Occupation

Differentiated tax rates on labor and capital income are found to be optimal in this study, where agents choose occupation based on lifetime income net of tuition costs. Efficient revenue raising in a case where the government cannot observe educational effort implies that the government should trade off efficiency in production for efficiency in intertemporal consumption. The subsequent wage difference between high-and low-skilled occupations is increased compared to a production efficient outcome, which is in contrast to previous results in the literature.