People"s income is what they have that they can spend on the market. When you tax the goods on the market, that"s called indirect taxation. For the govt: the educated population is better off. The trick to analyze intertemporal budgets is to treat each period as a separate good. Human capital h is in units of the consumption good. Individuals can borrow d of these units (or save, in which case d < 0) at a gross interest rate r > 1. Look at expected earnings you can get with education, health, etc. C0 = w + d - h. C0 is your consumption when you have your initial wealth when you borrow money, but you have to pay the cost of education. Your budget now when you"re in college. You may have to take a student loan, but you have to pay your future. Where you will earn the benefits from this.