Education and Taxation Policies in the Presence of Countervailing Incentives

Abstract

I examine income taxation and education policy when the government cannot observe individual productivity, and there exist conflicting incentives for individuals to understate and overstate their productivity. In this setting I identify four possible equilibria, and discuss the corresponding taxation/education policy mix. I show that no general restrictions on optimal taxation and education policy emerge in this environment, but each equilibrium and corresponding policy package can be associated with a country on the basis of its relative income and preference for redistribution.