Capital Income Taxation, Economic Growth, and the Politics of Public Education

By Tetsuo Ono and Yuki Uchida

http://d.repec.org/n?u=RePEc:osk:wpaper:1805&r=dge

This study considers the politics of public education and its impacts on economic growth and welfare across generations. Public education is funded by taxing the labor income of the working generation and capital income of the retired. We employ probabilistic voting to demonstrate the politics of taxes and expenditure and show that aging results in a shift of the tax burden from the old to the young and a slowdown of economic growth. We then consider three alternative constraints that limit the choice of taxes and/or expenditure: a minimum level of public education expenditure, an upper limit of the capital income tax rate, and a combination of the two. These constraints all create a trade-off between current and future generations in terms of welfare.

Japan worried about the consequences of population ageing on the economy. Not only is the share of the working-age population declining, it is also decreasing in absolute numbers. This paper highlights yet another worry: The old will vote for less public education.