On the Optimality of Optimal Income Taxation
19 Pages Posted: 5 May 2010
Date Written: April 2010
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.
Keywords: Optimal Income Taxation, Mechanism Design
JEL Classification: D82, D86, H21
Suggested Citation: Suggested Citation