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The Pareto-Frontier in a Simple Mirrleesian Model of Income Taxation

21 Pages Posted: 25 Sep 2013  

Felix J. Bierbrauer

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

Pierre Boyer

Ecole Polytechnique, Palaiseau - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: September 24, 2013

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 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, while simultaneously providing less public good.

Keywords: optimal income taxation, Laffer-curve, public-good provision

JEL Classification: H210, H410, D820

Suggested Citation

Bierbrauer, Felix J. and Boyer, Pierre, The Pareto-Frontier in a Simple Mirrleesian Model of Income Taxation (September 24, 2013). CESifo Working Paper Series No. 4399. Available at SSRN: https://ssrn.com/abstract=2330332

Felix J. Bierbrauer

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

Pierre C. Boyer (Contact Author)

Ecole Polytechnique, Palaiseau - Department of Economics ( email )

Route de Saclay
Palaiseau, 91120
France

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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