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The Pareto-Frontier in a simple Mirrleesian model of income taxation

Author

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  • Felix Bierbrauer

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

  • Pierre C. Boyer

    (Toulouse School of Economics (GREMAQ) and EHESS)

Abstract

We characterize the Pareto-frontier in a simple Mirrleesian model of income taxation. We show how the second-best frontier which incorporates incentive constraints due to private information on productive abilities relates to the first-best frontier which takes only resource constraints into account. In particular, we argue that the second-best frontier can be interpreted as a Laer-curve. We also use this second-best frontier for a comparative statics analysis of how optimal income tax rates vary with the degree of inequity aversion, and for a characterization of optimal public-good provision. We show that a more inequity averse policy maker chooses tax schedules that are more redistributive and involve higher marginal tax rates, but chooses a lower public-goods provision level.

Suggested Citation

  • Felix Bierbrauer & Pierre C. Boyer, 2010. "The Pareto-Frontier in a simple Mirrleesian model of income taxation," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2010_16, Max Planck Institute for Research on Collective Goods.
    • Handle: RePEc:mpg:wpaper:2010_16
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    References listed on IDEAS

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    1. Hellwig, Martin F., 2007. "A contribution to the theory of optimal utilitarian income taxation," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1449-1477, August.
    2. Stiglitz, Joseph E., 1987. "Pareto efficient and optimal taxation and the new new welfare economics," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 15, pages 991-1042, Elsevier.
    3. Boadway, Robin & Keen, Michael, 1993. "Public Goods, Self-Selection and Optimal Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 463-478, August.
    4. Bierbrauer, Felix J. & Boyer, Pierre C., 2013. "Political competition and Mirrleesian income taxation: A first pass," Journal of Public Economics, Elsevier, vol. 103(C), pages 1-14.
    5. Sandmo, Agnar, 1998. "Redistribution and the marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 70(3), pages 365-382, December.
    6. Weymark, John A, 1987. "Comparative Static Properties of Optimal Nonlinear Income Taxes," Econometrica, Econometric Society, vol. 55(5), pages 1165-1185, September.
    7. Gahvari, Firouz, 2006. "On the marginal cost of public funds and the optimal provision of public goods," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1251-1262, August.
    8. Felix Bierbrauer, 2009. "Optimal Income Taxation and Public Good Provision with Endogenous Interest Groups," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(2), pages 311-342, April.
    9. Jan Boone & Lans Bovenberg, 2007. "The Simple Economics of Bunching: Optimal Taxation with Quasi‐Linear Preferences," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(1), pages 89-105, February.
    10. Eytan Sheshinski, 1972. "The Optimal Linear Income-tax," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 39(3), pages 297-302.
    11. Boadway, Robin & Jacquet, Laurence, 2008. "Optimal marginal and average income taxation under maximin," Journal of Economic Theory, Elsevier, vol. 143(1), pages 425-441, November.
    12. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 175-208.
    13. repec:bla:jpbect:v:2:y:2000:i:4:p:435-60 is not listed on IDEAS
    14. Weymark, John A., 1986. "A reduced-form optimal nonlinear income tax problem," Journal of Public Economics, Elsevier, vol. 30(2), pages 199-217, July.
    15. Hellwig, Martin F., 1986. "The optimal linear income tax revisited," Journal of Public Economics, Elsevier, vol. 31(2), pages 163-179, November.
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    Cited by:

    1. Andrea Attar & Thomas Mariotti & François Salanié, 2020. "The Social Costs of Side Trading," The Economic Journal, Royal Economic Society, vol. 130(630), pages 1608-1622.
    2. Rafael Aigner, 2014. "Environmental Taxation and Redistribution Concerns," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 70(2), pages 249-277, June.
    3. Alain Trannoy, 2019. "Talent, equality of opportunity and optimal non-linear income tax," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 17(1), pages 5-28, March.
    4. Felix J. Bierbrauer & Pierre C. Boyer & Emanuel Hansen, 2023. "Pareto‐Improving Tax Reforms and the Earned Income Tax Credit," Econometrica, Econometric Society, vol. 91(3), pages 1077-1103, May.
    5. Felix Bierbrauer, 2010. "On the Optimality of Optimal Income Taxation," CESifo Working Paper Series 3163, CESifo.
    6. Bierbrauer, Felix J. & Boyer, Pierre C., 2013. "Political competition and Mirrleesian income taxation: A first pass," Journal of Public Economics, Elsevier, vol. 103(C), pages 1-14.
    7. Felix Bierbrauer, 2016. "Effizienz oder Gerechtigkeit? Ungleiche Einkommen, ungleiche Vermögen und die Theorie der optimalen Besteuerung," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2016_03, Max Planck Institute for Research on Collective Goods.
    8. Soldatos, Gerasimos T., 2015. "Tax Aversion, Laffer Curve, and the Self-financing of Tax Cuts," MPRA Paper 62470, University Library of Munich, Germany.
    9. Felix J. Bierbrauer, 2014. "Optimal Tax and Expenditure Policy with Aggregate Uncertainty," American Economic Journal: Microeconomics, American Economic Association, vol. 6(1), pages 205-257, February.
    10. Soldatos, Gerasimos T., 2015. "An Anti-Austerity Policy Recipe against Debt Accumulation in the Presence of Hidden Economy," MPRA Paper 69911, University Library of Munich, Germany.

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    More about this item

    Keywords

    Optimal Income Taxation; Public-good provision; Laer-Curve;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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