Investment in Education and the Time Inconsistency of Redistributive Tax Policy.

Time inconsistency of tax policy is shown to arise in a setting where households differ in their ability to accumulate wealth and where the government has redistributional objectives. It is assumed that wealth accumulation takes the form of human capital acquired through education. The government is precluded from redistributing to a first-best optimum by a self-selection constraint. The second-best is shown to be time-inconsistent. In the time-consistent optimum, households underinvest in education. An argument can be made for public intervention in the provision of education. Copyright 1996 by The London School of Economics and Political Science.