• Western Economics |
• Western Social Science

1. Effective Tax and Subsidy Rates on Human Capital

It is customary to sum up tax disincentives for investment in physical using marginal effective tax rates (ETRs). In a series of papers, Jim Davies and UWO graduate Kirk Collins have analyzed and implemented a comparable ETR for human capital. They have supplemented this with an ESR, or effective subsidy rate, reflecting subsidies to post-secondary institutions as well as student assistance. The ETR and ESR together summarize the tax and expenditure-side incentives for investment in human capital taking into account both the impacts when students are enrolled in college or university and after they graduate. Some key findings are (i) tax progressivity raises the ETR and discourages human capital investment, but that in practice subsidies are strong enough to more than offset this, (ii) ETRs are higher in Canada than in the U.S., and (iii) both ETRs and ESRs have declined in Canada over time.

Related Publications and Working Papers:

Burbidge, John, Collins, Kirk, Davies, James B., and Lonnie Magee, "Effective Tax and Subsidy Rates on Human Capital in Canada", revise and resubmit at Canadian Journal of Economics.

Collins, Kirk, and James B. Davies, "Effective Tax and Subsidy Rates on Human Capital Investment via Post-Secondary Education in Canada: 2000 and 2006," prepared for Department of Finance, Government of Canada, April 2007.

Collins, Kirk A., and James B. Davies, "Recent Changes in Effective Tax Rates on PSE Level Human Capital in Canada," in Charles M. Beach, Robin W. Boadway, and R. Marvin McInnis (eds.), Higher Education in Canada, McGill-Queen’s University Press for John Deutsch Institute for the Study of Economic Policy, Queen’s University, Montreal and Kingston, 2005, pp. 417-451.

Collins, Kirk A., and James B. Davies, "Measuring Effective Tax Rates on Human Capital: Methodology and an Application to Canada," in Peter Birch Sorensen (ed.), Measuring the Tax Burden on Capital and Labor, MIT Press, Cambridge, Mass., 2004: 171-212.

Collins, Kirk A., and James B. Davies, "Tax Treatment of Human Capital in Canada and the United States: An Overview and Examination of the Case of University Graduates," in Richard G. Harris (ed.), North American Linkages: Opportunities and Challenges for Canada, The Industry Canada Research Series, University of Calgary Press, Calgary, 2003, pp. 449-86.

2. The Self-Sufficiency Project

The Self-Sufficiency Project (SSP) was a large social experiment in British Columbia and New Brunswick designed to study the effects of providing cash payments for work rather than welfare for individuals on income assistance for an extended period of time. Audra Bowlus, Lance Lochner, Masashi Miyairi, and Chris Robinson use data from the experiment to estimate a lifecycle model in which individuals can improve their wages through human capital accumulation and job search. They then use estimates of their model to explore the effects of changing various parameters of the SSP (e.g. cash payment amount, required period on income assistance to qualify for cash payments).

3. Borrowing Constraints, Family Income, and Post-Secondary Financial Aid Policy

Numerous studies document important gaps in post-secondary attendance by parental income. Economists commonly attribute these differences to the role of borrowing constraints – youth from low-income families may not be able to borrow against high future earnings, so they do not attend college or university even when the long-run payoff may be high. With Western PhD student Philippe Belley, Lance Lochner explores changes in the importance of family income since the early 1980s. With Alexander Monge-Naranjo, Lochner develops a new human capital framework that incorporates key features of existing government student loan programs and private lenders. This model sheds new light on the importance of ability and family income as determinants of post-secondary schooling and helps explain a number of important changes in post-secondary attendance and finance since the early 1980s. Belley, Lochner, and Marc Frenette compare the relative importance of family income as a determinant of post-secondary attendance in Canada and the U.S. and explore the extent to which financial aid policies affect the income – attendance relationship. Using the Berea Panel Survey, Ralph and Todd Stinebrickner show that the attrition of post-secondary students from low income families is largely attributed to reasons other than financial difficulties present during school.

Related Publications and Working Papers:

Belley, Philippe, and Lance Lochner, "The Changing Role of Family Income and Ability in Determining Educational Achievement," Journal of Human Capital, 1(1), 2007: 37-89.

Belley, Philippe, Marc Frenette, and Lance Lochner, "Post-Secondary Attendance by Parental Income: A Canada – U.S. Comparison," Working Paper, 2010.

Lochner, Lance and Alexander Monge-Naranjo, "The Nature of Credit Constraints and Human Capital," forthcoming, American Economic Review (also CIBC Working Paper No. 2010-1), 2010.

Stinebrickner, Ralph, and Todd R. Stinbrickner, "The Effect of Credit Constraints on the College Drop-Out Decision: A Direct Approach Using a New Panel Study," American Economic Review, December (2008).

Stinebrickner, Ralph and Todd R. Stinebrickner, "Understanding Educational Outcomes of Students from Low-Income Families: Evidence from a Liberal Arts College with a Full Tuition Subsidy Program," Journal of Human Resources, 38(3), Summer 2003, 591-617.

Press References:

"Change Student-Loan System:  Researcher," Chip Martin, The London Free Press, February 11, 2011

"Editorial shorts: Midwest needs bigger share of R&D dollars," StarTribune.com, July 7, 2008.

"Don't just follow the money," Doug Lederman, Inside Higher Ed, August 24, 2007.

4. Immigration and Political Economy

The ability of workers to flow across borders should affect national labor supply elasticities, since mobile workers can leave when the reward from their labor falls. This, in turn, affects the labour supply response to taxes on labour income. James Davies and Stanley Winer consider the implications of severe immigration restrictions to the U.S. introduced in the Immigration Act of 1965 on the political economy of Canada in subsequent years, focusing on the implications for the structure of labour income taxes and the size of the public sector.

Related Publications and Working Papers:

Davies, James, and Stanley Winer, "Closing the 49th Parallel: An Unexplored Episode in Canadian Economic and Political History" (EPRI Working Paper 2008-03), 2008.

5. Efficiency and Equity Effects of Higher Education Policies in General Equilibrium

Elizabeth Caucutt and Krishna Kumar develop a simple dynamic general equilibrium framework to evaluate the consequences of further increasing higher education subsidies for inequality, welfare, and efficiency. This work focuses on three policies. The first is a tax and subsidy scheme that ensures that the parental decision to send a child to college is independent of income. Such a policy decreases the efficiency of the utilization of education resources, while the welfare gain is minimal. The second policy maximizes the fraction of college-educated labor. This results in a large drop in the above-mentioned efficiency with little or no welfare gain. The third is the provision of merit-based aid to the poor as opposed to purely need-based aid. This policy can increase education efficiency with little decrease in welfare. Based on these experiments, Caucutt and Kumar conclude that the case for further increases in higher education subsidies is overstated.

Related Publications and Working Papers:

Caucutt, Elizabeth M. and Krishna B. Kumar, "Higher Education Subsidies and Heterogeneity: A Dynamic Analysis," Journal of Economic Dynamics and Control, 27 (8) 2003: 1459-1502.

6. Tax Policy, Human Capital, and Economic Growth

Understanding the relationship between taxation, skill accumulation and growth is important for policymakers. Elizabeth Caucutt, Selahattin Imrohoroglu, and Krishna Kumar (2006) develop a general equilibrium model of endogenous growth with heterogeneity in income and tax rates in order to study the effect of tax progressivity on economic growth. They show that changes in the progressivity of tax rates can have positive growth effects even in situations where changes in flat rate taxes have no effect. Interestingly, progressive taxation, usually thought of as a policy that reduces inequality, can actually increase the skill premium in the long run and decrease the upward mobility of the poor. Caucutt, Imrohoroglu, and Kumar (2003) investigate these relationships quantitatively by studying a calibrated version of the model. Experiments indicate that the quantitative effects of moving to a flat rate system are economically significant. The assumption made about the engine of growth – an external effect arising from production activities of skilled workers or intentional employment of skilled workers for research and other productivity enhancing activities -- has an important effect on the impact of a change in progressivity. Welfare is unambiguously higher in a flat rate system when comparisons are made across balanced growth equilibria; however, when the costs of transition to the higher growth equilibrium are taken into account, only the currently skilled slightly prefer the flat rate system.

Related Publications and Working Papers:

Caucutt, Elizabeth M., Selahattin Imrohoroglu and Krishna B. Kumar, "Growth and Welfare Analysis of Tax Progressivity in a Heterogeneous-Agent Model," Review of Economic Dynamics, 6 (3) 2003: 546-577.

Caucutt, Elizabeth M., Krishna B. Kumar and Selahattin Imrohoroglu, "Does the Progressivity of Income Taxes Matter for Human Capital and Growth?," Journal of Public Economic Theory, 8(1) 2006: 95-118.

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