Federations Alternative Tax Constitutions and Risky Education

We analyze a two-period model, where risk-averse students divide their time between risky education, leisure and work. The education can migrate. Wage-tax financed transfer to students acts as an insurance, and increases both investment in education and demand for leisure. We derive sufficient conditions for tax competition to lead to too low wage tax rates. We suggest, that the educated should pay their wage taxes to the region which has financed their education. We show that this would increase taxation and investment in education, and would benefit also the owners of the complementary factor.

Poutvaara, P. (1999), Federations Alternative Tax Constitutions and Risky Education, ZEW Discussion Paper Nr. 99-42, Mannheim.