Greg ponders whether or not Ed Lazear should follow his gut and assume that taxes discourage people from becoming more educated or follow Larry Katz’s analysis that there is no relationship.
This situation exemplifies a common conundrum for policy advisers like Eddie. In the absence of hard evidence, should he act as if there is no effect, as Larry seems to be suggesting here? Or should Eddie rely on the general principle that people respond to incentives and make an educated guess about the magnitude?
The problem, however, is we don't even know what the sign is. That is we don’t know if taxes increase or decrease the incentive to become more educated.
It could be that higher tax cause people to increase their educational attainment.
Also, the term higher/lower taxes is a bit misleading.
Raising the child credit would count as "lower taxes" for most policy makers. Show me the economic model where raising the child credit increases human capital accumulation.
I can build at least two strong arguments around a child credit decreasing human capital accumulation, especially of course among women.
Now if you said that we are going to specifically find ways to reduce the return to education then ok, at least you now have an ambivalent effect.
On the one hand lower returns to education would cause people to substitute towards other forms of wealth generation. On the other it would have a negative wealth effect for the talented which could cause them to seek more education.
One of the deepest problems for policy advisor is that the general equilibrium effects of a policy can be exactly the opposite of what you would first expect. When you tax something you get less of it, right?
Well, not necessarily. It depends on how you tax it, what you do with the tax revenues, and what options people have for avoiding the tax burden. The devil is in the details and the details are always a mess.