TY - JOUR AU - Heckman,James J. AU - Lochner,Lance AU - Taber,Christopher TI - General Equilibrium Cost Benefit Analysis of Education and Tax Policies JF - National Bureau of Economic Research Working Paper Series VL - No. 6881 PY - 1999 Y2 - January 1999 UR - http://www.nber.org/papers/w6881 L1 - http://www.nber.org/papers/w6881.pdf N1 - Author contact info: James J. Heckman Department of Economics The University of Chicago 1126 E. 59th Street Chicago, IL 60637 Tel: 773/702-0634 Fax: 773/702-8490 E-Mail: jjh@uchicago.edu Lance Lochner Department of Economics, Faculty of Social Science University of Western Ontario 1151 Richmond Street, North London, ON N6A 5C2 CANADA Tel: 519/661-2111 ext. 85281 Fax: 519/661-3666 E-Mail: llochner@uwo.ca Christopher R. Taber Department of Economics University of Wisconsin -Madison 1180 Observatory Dr Social Sciences Building #6448 Madison, WI 53706-1320 Tel: (608) 263-7791 Fax: (608) 262-2033 E-Mail: ctaber@ssc.wisc.edu AB - This paper formulates and estimates an open-economy overlapping generation general-equilibrium model of endogenous heterogeneous human capital in the form of schooling and on-the-job training. Physical capital accumulation is also analyzed. We use the model to explain rising wage inequality in the past two decades due to skill-biased technical change and to estimate investment responses. We compare an open economy version with a closed economy version. Using our empirically grounded general equilibrium model that explains rising wage inequality, we evaluate two policies often suggested as solutions to the problem of rising wage inequality: (a) tuition subsidies to promote skill formation and (b) tax policies. We establish that conventional partial equilibrium policy evaluation methods widely used in labor economics and public finance give substantially misleading estimates of the impact of national tax and tuition policies on skill formation. Conventional microeconomic methods for estimating the schooling response to tuition overestimate the response by an order of magnitude. Simulations of our model also reveal that move to a flat consumption tax raises capital accumulation and the real wages of all skill groups and barely affects overall measures of income inequality. ER -