Does the Tax System Encourage Too Much Education?

This paper provides an efficiency argument in favor of progressive labor income taxation. When the consumer faces a trade-off between investments in financial and human capital, a proportional comprehensive income tax tends to discriminate in favor of human capital investments. This effect is strengthened when education no longer is a pure investment, but also holds a direct consumption value.A comprehensive proportional income tax works as a tax subsidy on human capital investments, and it reduces the price of education as a consumption good. By introducing a progressive labor income tax, the efficiency distortion in the capital market may be partly neutralised.