Should educational expenses be deductible?: A comparison of tax bases in a model where education is a choice variable

The paper studies the design of an educational policy within the context of an optimal taxation model where individuals are free to choose how much education to acquire, and also have a discrete labor-leisure choice. A linear income tax and tax deductibility of educational expenses are the only instruments available to the government, whose goal it is to use these instruments so as to maximize the utility of the worst off individual in society. The main focus of the study is how large a fraction of educational expenses should be deductible. A variation of this fraction has several opposing effects. The optimal size of the fraction depends therefore in a complicated way on the distribution of ability, the costs of producing education, and the effect of education on wages and productivity. There is no general case either for no deductibility or for full deductibility.