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Optimal Income Taxation: Mirrlees Meets Ramsey

Author

Listed:
  • Hitoshi Tsujiyama

    (Goethe University Frankfurt)

  • Jonathan Heathcote

    (Federal Reserve Bank of Minneapolis)

Abstract

This paper offers a quantitative exploration of optimal income tax design in the Mirrlees tradition, and asks how nearly simple parametric tax functions can decentralize constrained efficient allocations. The environment features both observable and unobservable components of idiosyncratic labor productivity, and both public and private insurance. Given a social welfare function that rationalizes the amount of redistribution built into the current US tax code, we find that potential welfare gains from tax reform are very small. We also find that it is more important that the tax system features marginal tax rates that increase with income than that it feature universal lump-sum transfers.

Suggested Citation

  • Hitoshi Tsujiyama & Jonathan Heathcote, 2014. "Optimal Income Taxation: Mirrlees Meets Ramsey," 2014 Meeting Papers 260, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:260
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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