Expected Future Earnings, Taxation, and University Enrollment: A Microeconometric Model with Uncertainty

Taxation changes the expectations of prospective university students about their future level and uncertainty of after-tax income. To estimate the impact of taxes on university enrollment, we estimate a structural microeconometric model, in which a high-school graduate decides to enter university studies if expected lifetime utility from this choice is greater than that anticipated from starting to work right away. We estimate the ex-ante future paths of the expectation and variance of after-tax income for German high-school graduates, accounting for nonrandom selection. The enrollment model takes into account university dropout and unemployment risks. Consistently with expectations, the estimation results indicate that higher expected returns to an academic education increase the probability of university enrollment, whereas higher uncertainty among academics decreases enrollment rates. A simulation based on the estimated model indicates that a revenue-neutral, flat-rate tax reform with an unchanged basic tax allowance would increase enrollment rates for men in Germany.