When they allow the skills to be imperfectly substitutable (elasticity of substitution 0.28) the subsidy rates go up even more, and taxes (as well as progressivity) decline substantially, particularly when transitional dynamics are taken into account. For example, with transitional dynamics factored in, the optimal subsidy rate becomes 150% of the costs of education. However, taxes and the deductible are reduced substantially relative to the baseline. This is because the increase in the supply of college graduates leads to a compression of the college premium, and hence of the wage distribution, which provides the required insurance against low ability. This allows the planner to reduce taxes a lot to protect the early generations from the high tax rates, while “providing” the required insurance by allowing the decline in the skill premium.