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Findeisen, Sebastian; Sachs, Dominik (2018): Education Policies and Taxation without Commitment. In: Scandinavian Journal of Economics, Vol. 120, No. 4: pp. 1075-1099
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We study the implications of limited commitment on education and tax policies set by benevolent governments. Consistent with real-world practices, a government can decide to subsidize different levels of education at different rates. A lack of commitment, however, affects the optimal structure of education subsidies. The direction of the effect depends on how labor taxes are designed. With linear labor tax rates and a transfer for redistribution, subsidies become more progressive. By contrast, if the government is only constrained by informational asymmetries when designing taxes, subsidies become more regressive.