The Pareto-Frontier in a Simple Mirrleesian Model of Income Taxation
21 Pages Posted: 25 Sep 2013
Date Written: September 24, 2013
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
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