Mirrlees model of optimum income taxation book

Mirrlees continued to work on optimal tax theory, leading to an. Pdf the theory of optimal income taxation researchgate. Mirrlees 1971, diamond 1988, saez 2001 agents differ wrt unobservable log productivity planner only observes earnings x exp h think of planner choosing c, x for each type include incentive constraints, s. Being a student of nobelprize winner james mirrlees, matti tuomala has devoted large parts of his academic career to extending the mirrlees 1971 framework of optimal nonlinear income taxation. An exploration in the theory of optimum income taxation, res, 1971. Optimal top income tax rate revenue maximizing top marginal tax rate above z. The ideas of james mirrlees, 19362018 vox, cepr policy portal. Mirrlees wrote a groundbreaking paper, in which he attempted to answer the question of what an optimum income. In the us, it is called the earned income tax credit. The papers centred on asymmetric information, which determines the extent to which they should affect the optimal rate of saving in an economy. In his model, individuals have identical utility functions but differ in their skills and pretax wage rates. Optimal nonlinear income taxation with costly tax avoidance. For a simpler and clearer version of the model see diamond 1998, and for a thorough discussion of their properties see saez 2001.

My father came there in 1934, newly married, to be a teller in one of the six banks. Atkinson and stiglitz 1976 extended income tax model proposed by the mirrlees 1971. Back in 1971, a scottish economist by the name of james a. Even in a highly socialist economy, where all who work are employed by the state, the shadow price of highly skilled. Mirrlees builds a model of an economy not unlike that found in america. Mirrlees and stern macmillan, 1973 selected papers with n. James mirrlees wikimili, the best wikipedia reader. He published a book on this topic in 1990 entitled optimal income tax and redistribution oup. Mirrlees later presents an example and attains a solution based on results flowing from.

Call an individual whose abilityparameter is n an nman. With little he contributed to development economics through the manual, a practical guide to the use of costbenefit analysis. On the optimal progressivity of the income tax code, journal of monetary economics, elsevier, vol. Income taxation, public sector pricing and redistribution. Income taxation and public sector pricing are considered in an integrated controltheory model of the mirrlees tradition. The standard theory of optimal taxation posits that a tax system should be chosen to maximize a social welfare function subject to a set of constraints. Mirrlees assumed that taxation should be based on a mans incomeearning potential, and that the most reliable indicator of his incomeearning potential is his income. Mirrlees optimal income tax model we will solve the mirrleesian model later. Going back to the mirrlees model, a structure of falling marginal tax rates is the opposite of what we are used to see. A reexamination of the optimal nonlinear income tax.

Models of economic growth, introduction to volume of same title, eds. Optimal capital income taxation is a subarea of optimal tax theory which refers to the study of designing a tax on capital income such that a given economic criterion like utility is optimized. Twl where c consumption, l labor supply, w wage rate, t. Sir james mirrlees has been influential in several areas. Optimal labor income taxation university of california, berkeley. The seminal paper dealing with this problem is mirrlees 1971, and mirrleesian taxation has been identified with the distributional and incentive role of taxation. I must confess that i had expected the rigorous analysis of income taxation in the utilitarian manner to provide arguments for high tax rates. It provides a new, intuitive characterisation of the optimum, relating two cost terms that are directly interpretable as the marginal costs of inefficiency and of inequality respectively.

An example with a ushaped pattern of optimal marginal rates, aer 1998 article in pdf format saez, using elasticities to derive optimal. Using the mirrlees optimal income tax model with quasilinear preferences, the paper examines. We consider a model environment similar to the ones in these existing papers. Sir james alexander mirrlees 5 july 1936 29 august 2018 was a scottish economist and winner of the 1996 nobel memorial prize in economic sciences.

There has been relatively little attention devoted to studying optimal income taxation when both ability di. Mirrlees 1971 pioneered the analysis of this challenging problem. Among other results, he demonstrated the principles of moral hazard and optimal income taxation discussed in the books of william vickrey. Aggregate production with consumption externalities, the quarterly journal of economics, oxford university press, vol. Social benefitcost analysis and the distribution of income, world development, 1978 a model of optimal social insurance with variable retirement. A reexamination of the optimal nonlinear income tax udo ebert institute of economics, university of oldenburg, p. Citeseerx document details isaac councill, lee giles, pradeep teregowda. The consumption choice of an nman is denoted by x, y. He was knighted in the 1997 birthday honours early life and education. The standard optimal income tax model involves a oneperiod setting in.

They considered the choice of a linear progressive income tax in a model with two abilitytypes and uncertain earnings. Optimal income tax theory incorporates behavioral responses mirrlees. He developed the theory of optimal income taxation and in so. An exploration in the theory of optimum income taxation. Second, we present the simple model of optimal linear taxation. We emphasize connections between theory and empirical work that were initially lacking from optimal income tax theory. Born in minnigaff, kirkcudbrightshire, mirrlees was educated at douglas ewart high school, then at the university of edinburgh ma in mathematics and natural. When we look at income tax rates schedules they usually have increasing marginal tax rates, like this one. Optimal taxation in theory and practice 060109 final. Philosophical objection to the optimal tax model, a. Optimal redistributive taxation download only books. Suppose that the government needs to raise a given amount of revenue to nance public programs and that it cares about social welfare. They found that income tax optimality is theoretically solution and that commodity tax should uniform or zero.

Our main result demonstrates that the prescriptions for optimal income taxation obtained under the mirrlees approach are very sensitive to the 2varian 1980 and albanesi 2006 are exceptions. Mirrlees optimum income taxation 177 will be assumed that f is differentiable, so that there is a density function for ability, fn f1n. Mirrlees biographical n ewton stewart is a town of two thousand people in the beautiful centre of galloway, in the southwest of scotland. Mirrlees 1971 model is a milestone in the study of optimal nonlinear taxation of. An exploration in the theory of optimum income taxation j. Sir james mirrlees, corecipient of the 1996 nobel memorial prize in economic. We address this question in an environment featuring distinct roles for public and private insurance. From optimal tax theory to applied tax policy erasmus. In common with mirrlees 1971, the as model assumes a single form of income support carried out through an optimal uniform lumpsum grant called the demogrant.

Under this speci cation, a higher marginal tax rate. Static optimal taxation how should government set taxes. Mirrlees 1971 paper 1, in which he explores an optimal income tax rate structure. In the classical framework initiated by mirrlees 1971, the theory studies the maximization of a utilitarian social welfare function by a. Section 3 discusses the optimal linear income tax problem. Therefore, the optimal taxation problem not only involves dealing with redistribution of income and changes in incentives but also with one informational friction.

First, we provide historical and international background on labor. An exploration in the theory of optimum income taxation, 1971. Under the mirrlees model, the government can adopt a tax structure with a demogrant and continuously variable that is changing marginal tax rates, rather than a demogrant coupled with a flat rate. Mirrlees 1971 introduces the incentive considerations by adding an incentive compatibility constraint to the optimal tax problem. The methodology has since become the standard in the field. A brief discussion of considerations of equity is offered in section 5 and concluding remarks in section 6. The model maximizes a social welfare function subject to the conservation of wealth in the society. The standard mirrlees income tax model has a very particular form of information asymmetry. The extreme case of e 0 is examined, in the mirrlees model, in section 5 and we find the optimum income taxation linear or nonlinear involves marginal taxation at 100 percent.

Introduction one would suppose that in any economic system where equality is valued, progressive income taxation would be an important instrument of policy. The book explains in depth the mirrlees model and presents various extensions of it. Diamond 1980 stated that at the presence of the distributive grants, commodity tax should be progressive. Little, imd and ja mirrlees 1969, manual of industrial project. Comprehensive description in gruber undergrad textbook. James mirrlees wikimili, the free encyclopedia wikimili, the free encyclopedia. Northholland publishing company optimum income taxation with discrete populations nicholas stern university of warwick, coventry cv47al, uk introduction mirfees 1971 is the starting point for modern work on optimum income taxation. To this end, this paper reassesses optimal tax policy in the celebrated mirrlees 1971 model. The second welfare theorem tells us that any pareto e cient allocation can be.