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On the optimality of optimal income taxation

Author

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  • Felix Bierbrauer

    (Max Planck Institute for Research on Collective Goods, Bonn)

Abstract

The Mirrleesian model of income taxation restricts attention to simple allocation mechanism with no strategic interdependence, i.e., the optimal labor supply of any one individual does not depend on the labor supply of others. It has been argued by Piketty (1993) that this restriction is substantial because more sophisticated mechanisms can reach first-best allocations that are out of reach with simple mechanisms. In this paper, we assess the validity of Piketty's critique in an independent private values model. As a main result, we show that the optimal sophisticated mechanism is a simple mechanism, or, equivalently, a Mirrleesian income tax system.

Suggested Citation

  • Felix Bierbrauer, 2010. "On the optimality of optimal income taxation," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2010_14, Max Planck Institute for Research on Collective Goods.
    • Handle: RePEc:mpg:wpaper:2010_14
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    Keywords

    Optimal Income Taxation; Mechanism Design;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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