| Abstract: | When educational policy is supplemented by a redistributive income tax, and when individuals differ in their ability to benefit
from education, the optimal policy is typically rather regressive. Resources are concentrated on the most able individuals
in order to get a “cake” as big as possible to share among individuals through income taxation. In this paper, we put forward
another reason to push for regressive education. It is not linked to heterogeneity in innate ability but to the property that
welfare may be a convex function of an individual’s wage. For simplicity, we assume a linear education technology and a given
education budget. To give the equal wage outcome the best chance to emerge, we also assume that individuals have identical
learning abilities. Nevertheless, it turns out that in the first-best wage inequality is always preferable to wage equality.
Even more surprisingly, this conclusion remains valid in the second-best when the feasible degree of wage differentiation
is sufficiently large. This is in spite of the fact that wage equalization would eliminate any need for distortionary income
taxation. |
