Impact of United States income tax on education: A panel study

Khaleque, Farzana

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https://hdl.handle.net/2142/21716 Copy

Description

Title

Impact of United States income tax on education: A panel study

Author(s)

Khaleque, Farzana

Issue Date

1994

Doctoral Committee Chair(s)

Leuthold, Jane H.

Department of Study

Economics

Discipline

Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• Economics, General
• Economics, Labor

Language

eng

Abstract

• The focus of my dissertation is to examine the impact of income taxes on whether or not to attend college. This is an interesting issue because it is known that current investment in education or other forms of human capital will most certainly enhance the quality or productive capacity of an individual in the future. Recent findings reveal that taxes have minimal effect on quantity of current labor supply. Taxes however can either stimulate or depress the acquisition of skill or knowledge. This in turn tends to effect the quality of future labor supply.
• A lot of work has been done on human capital with no explicit focus on schooling behavior. A typical study evaluates a human capital production function embedded in a life-cycle setting. Most of the analysis by other researchers have been theoretical in nature resulting in conflicting propositions. An empirical study can say something definitive on the actual influence that the U.S. income tax has on schooling behavior. I develop a simple two-period model which deals with proportional and progressive taxes in a certain environment.
• I start with a simple model with both out-of-pocket expenditure and foregone earnings as full cost of education. Borrowing is introduced to finance direct expenses. The interest income from borrowed fund is tax deductible. The individual wants to maximize his utility based on his two period consumption. The comparative static results reveal that the partial derivative of interest income tax on schooling is positive. The impact of wage tax on schooling is negative. This result is different from Eaton and Rosen's. They demonstrate that a wage tax has no impact on a person's decision to go to school. Due to the introduction of direct cost of schooling in my model the wage tax has a negative influence on schooling. However, I get the same result as Eaton and Rosen if I exclude the direct cost of education. The end result of the effect of a proportional income tax on schooling is ambiguous. This result is again different from what Heckman and Eaton and Rosen found. They found that a proportional income tax has a favorable impact on schooling. Introduction of progressive tax on second period wages shows that both an interest income tax and a wage tax have a positive impact on schooling.
• In light of the conflicting theoretical results, it was necessary to conduct an empirical study. I used Michigan Panel Study of Income Dynamics, 1970-1987, to estimate an earnings equation, net and gross of tax, using a sample of 1774 heads of household. The interesting finding was that the earnings profile is more peaked for individuals with a higher level of education than for those with less education. The age-net earnings profile is much flatter for the non-college group compared to the college group. It was also found that government public policy reduces lifetime incomes substantially for the college group compared to the non-college group across all demographic groups.
• A college probit model was formulated based on a sample of 400 individuals. The results show that there is not enough statistical evidence to support the hypothesis that high marginal income tax rates encourage investment in higher education. With appropriate controls in the model, the marginal effect of the tax rates on schooling behavior is a very small positive number, which also happen to be statistically insignificant. This is because of the high correlation between marginal tax rates and labor incomes. Rates of return computed from the earnings equation indicate that taxation have a positive impact on the probability of attending college.

Type of Resource

text

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Copyright and License Information

Copyright 1994 Khaleque, Farzana

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