Education Vouchers: Means Testing Versus Uniformity

Abstract

This paper compares a uniform education voucher system with means-tested scheme in which the voucher is subject to a taper or withdrawal rate as parental gross income increases. Parents are assumed to maximise a utility function which includes their consumption, leisure and the human capital of children. The human capital production function has inputs consisting of parental human capital and expenditure on education. The government faces a budget constraint such that the voucher and a social dividend are financed from a proportional income tax. Alternative combinations of voucher and tax and transfer schemes are evaluated using a social welfare function defined in terms of the utility of parents. It is found that for all combinations of policy variables, a uniform voucher turns out to be optimal. However, if a binding constraint is placed on the maximum tax rate, means-testing, with a low taper, is found to be optimal.