Document Type

Dissertation

Date of Degree

Spring 2015

Degree Name

PhD (Doctor of Philosophy)

Degree In

Economics

First Advisor

Martin Gervais

Abstract

This dissertation contributes to the current understanding of human capital and its importance for earnings inequality and taxation. Human capital is typically defined as the stock of knowledge or skills acquired through education and working experience. The first chapter analyzes student borrowing behaviors in postsecondary education in the United States, the second chapter studies cross-country differences in earnings inequality within an endogenous growth model of human capital accumulation, and the third chapter examines the impact of endogenous human capital formations over a life-cycle on optimal fiscal policy.

In Chapter 1, I document that new federal student loans for higher education in the United States have risen more than 5 times over the past 20 years. What caused this dramatic increase? I develop a heterogeneous life-cycle model of human capital accumulation to analyze individual college and borrowing decisions. Using this framework, I assess the quantitative contributions of changes in the college wage premium, college costs, maximum borrowing limits, and loan interest rates to explain the significant rise of federal student loans. I find that the calibrated model accounts for 57 percent of the actual increase in loans from 1990 to 2011. Increases in the college wage premium and college costs are important factors in generating the sharp rise in loans and, particularly, the increase in the fraction of borrowers and borrowing amounts. The expansion of credit availability and decreased loan interest rates have a relatively minimal impact on individual college and borrowing decisions.

Chapter 2 explores why earnings inequality has been substantially higher in the US than in European countries over the last 30 years. I focus on the role of differences in tax progressivity, intergenerational earnings persistence, returns to education investments, and public education spending. I develop a growth model of human capital accumulation, and show analytically how those factors affect the dynamics of earnings inequality. The calibrated model accounts for 31 percent of the observed differences in earnings inequality between European countries and the US for 2003-07. Differences in returns to education investments and intergenerational earnings persistence are quantitatively important, suggesting the potential role of educational policy in ameliorating rising earnings inequality.

Chapter 3, written jointly with Martin Gervais, analyzes the role of endogenous human capital accumulation in shaping optimal fiscal policy within a life-cycle growth model. We show that when investment in human capital is not verifiable---making the tax code incomplete---a non-zero capital income tax becomes optimal in order to alleviate the distortionary effects of the labor income tax on investment in human capital. This is true even if the government has access to a full set of age-dependent labor and capital income taxes. The main result is in sharp contrast to the finding in Jones et al. (1997) that all interest taxes are zero in infinitely-lived agent models with endogenous human capital formation.

Public Abstract

This thesis adds to the current area of human capital and analyzes its importance for earnings inequality and taxation. Chapter 1 documents a dramatic increase in new federal student loans for higher education in the United States over the past 20 years, and addresses the question of what caused this sharp rise. The main finding is that increases in the college wage premium and college costs are important driving factors and that expansions of credit availability and decreased loan interest rates have a relatively minimal impact on the rise in federal student loans. Chapter 2 explores why earnings inequality has been substantially higher in the US than in European countries over the last 30 years. Using an endogenous growth model of human capital accumulation, I find that differences in education system and intergenerational earnings persistence are quantitatively important, suggesting the potential role of educational policy in ameliorating rising earnings inequality. Chapter 3 analyzes the role of endogenous human capital formation in shaping optimal fiscal policy within a life-cycle growth model. The key finding is that when investment in human capital is not verifiable to the government, a non-zero capital income tax becomes optimal in order to mitigate the distortionary effects of the labor income tax on investment in human capital. This main result is in sharp contrast to the finding of Jones et al. (1997) that all interest taxes are zero in infinitely-lived agent models with endogenous human capital formation.

Keywords

publicabstract, Earnings Inequality, Human Capital, Optimal Taxation, Student Loans

Pages

xii, 113

Bibliography

208-113

Copyright

Copyright 2015 Dohyoung Kwon

Included in

Economics Commons

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