On the Optimality of Optimal Income Taxation

22 Pages Posted: 13 Sep 2010

See all articles by Felix J. Bierbrauer

Felix J. Bierbrauer

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

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Date Written: August 31, 2010

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.

Keywords: optimal income taxation, mechanism design

JEL Classification: D82, D86, H21

Suggested Citation

Bierbrauer, Felix J., On the Optimality of Optimal Income Taxation (August 31, 2010). CESifo Working Paper Series No. 3163. Available at SSRN: https://ssrn.com/abstract=1676188

Felix J. Bierbrauer (Contact Author)

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

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