Taxes Matter VII: Tax Progressivity and Education

Taxes Matter VII: Tax Progressivity and Education

May 9, 2007 Posted by J. Scott Moody - No Comments

Many politicians in Augusta believe that Maine’s tax systems should be even more progressive than it is currently. Progressive in the sense that those who earn more also pay a higher percentage of their income in taxes. At the same time, many of the same folks believe that we must invest more in education in order to improve the economy. Unfortunately, the two ideas may be mutually exclusive.
A new article by Gary Becker, the 1992 Nobel Prize winner, and Kevin Murphy, the 1997 John Bates Clark Medal winner, finds that tax progressivity acts as a disincentive to people wanting to earn a higher level of education. They state:
“This brings us to our punch line. Should an increase in earnings inequality due primarily to higher rates of return on education and other skills be considered a favorable rather than an unfavorable development? We think so. Higher rates of return on capital are a sign of greater productivity in the economy, and that inference is fully applicable to human capital as well as to physical capital. The initial impact of higher returns to human capital is wider inequality in earnings (the same as the initial effect of higher returns on physical capital), but that impact becomes more muted and may be reversed over time as young men and women invest more in their human capital . . . For many, the solution to an increase in inequality is to make the tax structure more progressive–raise taxes on high-income households and reduce taxes on low-income households. While this may sound sensible, it is not. Would these same individuals advocate a tax on going to college and a subsidy for dropping out of high school in response to the increased importance of education? We think not. Yet shifting the tax structure has exactly this effect.”