We study a model of human capital driven growth, where the parents human capital serves as a productive input in the childs human capital production only when that of the former exceeds a minimum level required to intellectually contribute to the child's learning. Private and public expenditures on education enter in the childs human capi- tal production function, and are allowed to vary in terms of substitutability and relative productivity. Households receive income from labor and face both labor and consump- tion taxes. The government receives consumption tax revenues and a proportion of income tax revenues and spends these revenues on public education. We calibrate the model to a state in India and experimentally increase public education spending through various tax instruments. We find that raising the consumption tax generates about as much economic growth as realizing an increase in the center-state transfer from the federal level. We also find that financing this increase in public spending through the labor tax increases economic growth by less than utilizing the consump- tion tax; however, it reduces inequality by more than utilizing the consumption tax. Hence, there is growth-inequality trade-off. We extend our results by characterizing their dependence on the degree of substitutability between public and private educa- tion spending.
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