The Pareto-Frontier in a Simple Mirrleesian Model of Income Taxation
20 Pages Posted: 14 May 2010 Last revised: 9 Jan 2011
Date Written: May 1, 2010
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 Laffer-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.
Keywords: Optimal Income Taxation, Public-Good Provision, Laffer-Curve
JEL Classification: D82, H21, H41
Suggested Citation: Suggested Citation