Education Investment and Globalization in a Heterogeneous Population

This paper examines the properties of an optimal income taxation programme under general equilibrium, in which the public policy trade-off �equity vs. efficency� interacts with the accumulation of human capital. We analyse how globalization modifies the trade-off and how the change in optimal taxation reveals the efficiency of the public policy. Generically, opening to free trade locally decreases optimal income redistribution, while increasing subsidies to education. This leads to increased investment decisions in education, that could prove socially sub-optimal under certain conditions. We develop a 2-good,2-factor model of general equilibrium with two levels of labour productivity and with heterogeneous costs of educating. The government redistributes income through wages taxation, which serves equity purposes but interfere as well with incentives to educate. Optimal taxation faces a screening problem which generates ineffiencies. Opening to international trade reshapes the optimal taxation problem because it modifies the sensitivity of agents� responses to a change in public policy