Mirrlees model of optimum income taxation book

Under this speci cation, a higher marginal tax rate. 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. 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. Going back to the mirrlees model, a structure of falling marginal tax rates is the opposite of what we are used to see. Second, we present the simple model of optimal linear taxation. The book explains in depth the mirrlees model and presents various extensions of it. Mirrlees wrote a groundbreaking paper, in which he attempted to answer the question of what an optimum income. Optimal redistributive taxation download only books. Mirrlees and others published the theory of optimal income taxation find, read and cite all the research you need on. A reexamination of the optimal nonlinear income tax.

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. The model maximizes a social welfare function subject to the conservation of wealth in the society. Philosophical objection to the optimal tax model, a. Social benefitcost analysis and the distribution of income, world development, 1978 a model of optimal social insurance with variable retirement.

There has been relatively little attention devoted to studying optimal income taxation when both ability di. On the optimal progressivity of the income tax code, journal of monetary economics, elsevier, vol. An exploration in the theory of optimum income taxation, 1971. An exploration in the theory of optimum income taxation j. From optimal tax theory to applied tax policy erasmus. Citeseerx document details isaac councill, lee giles, pradeep teregowda. 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. 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. Born in minnigaff, kirkcudbrightshire, mirrlees was educated at douglas ewart high school, then at the university of edinburgh ma in mathematics and natural philosophy in 1957 and trinity college, cambridge mathematical tripos and phd in 1963 with thesis title optimum planning for a dynamic economy, supervised by richard stone. In the us, it is called the earned income tax credit. With little he contributed to development economics through the manual, a practical guide to the use of costbenefit analysis. Optimal nonlinear income taxation with costly tax avoidance. An exploration in the theory of optimum income taxation, res, 1971.

Mirrlees continued to work on optimal tax theory, leading to an. Twl where c consumption, l labor supply, w wage rate, t. Optimal income taxation theory and principles of fairness. He was knighted in the 1997 birthday honours early life and education. Suppose that the government needs to raise a given amount of revenue to nance public programs and that it cares about social welfare. Mirrlees optimum income taxation 177 will be assumed that f is differentiable, so that there is a density function for ability, fn f1n.

They considered the choice of a linear progressive income tax in a model with two abilitytypes and uncertain earnings. Mirrlees biographical n ewton stewart is a town of two thousand people in the beautiful centre of galloway, in the southwest of scotland. We address this question in an environment featuring distinct roles for public and private insurance. James mirrlees wikimili, the free encyclopedia wikimili, the free encyclopedia.

First, we provide historical and international background on labor. Among other results, he demonstrated the principles of moral hazard and optimal income taxation discussed in the books of william vickrey. Born in minnigaff, kirkcudbrightshire, mirrlees was educated at douglas ewart high school, then at the university of edinburgh ma in mathematics and natural. Mirrlees later presents an example and attains a solution based on results flowing from. Optimal labor income taxation university of california, berkeley. James mirrlees wikimili, the best wikipedia reader. Mirrlees and stern macmillan, 1973 selected papers with n. Starting from the conceptualization of capital income as future consumption, the taxation of capital income corresponds to a differentiated consumption tax on present and future consumption. Mirrlees 1971 introduces the incentive considerations by adding an incentive compatibility constraint to the optimal tax problem.

Models of economic growth, introduction to volume of same title, eds. Static optimal taxation how should government set taxes. I must confess that i had expected the rigorous analysis of income taxation in the utilitarian manner to provide arguments for high tax rates. The standard optimal income tax model involves a oneperiod setting in.

Little, imd and ja mirrlees 1969, manual of industrial project. Mirrlees 1971 paper 1, in which he explores an optimal income tax rate structure. 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. The standard mirrlees income tax model has a very particular form of information asymmetry. They found that income tax optimality is theoretically solution and that commodity tax should uniform or zero. The ideas of james mirrlees, 19362018 vox, cepr policy portal. Optimal top income tax rate revenue maximizing top marginal tax rate above z. It is shown that the often alleged separability between income taxation as a purely distributional instrument and public pricing as a purely allocational instrument usually does not. Income taxation, public sector pricing and redistribution. Income taxation and public sector pricing are considered in an integrated controltheory model of the mirrlees tradition. We consider a model environment similar to the ones in these existing papers. Mirrlees optimal income tax model we will solve the mirrleesian model later. 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. Mirrlees 1971 pioneered the analysis of this challenging problem.

Introduction one would suppose that in any economic system where equality is valued, progressive income taxation would be an important instrument of policy. Diamond 1980 stated that at the presence of the distributive grants, commodity tax should be progressive. Optimal income tax theory incorporates behavioral responses mirrlees. Optimal taxation in theory and practice 060109 final. Mirrlees builds a model of an economy not unlike that found in america. 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.

Mirrlees also proved that the marginal tax rate on the highestincome person should be zero. Mirrlees wrote, i must confess that i had expected the rigourous analysis of income taxation in the utilitarian manner to provide arguments for high tax rates. For now, lets look at the spirit of optimal tax evolution. Section 3 discusses the optimal linear income tax problem. When we look at income tax rates schedules they usually have increasing marginal tax rates, like this one. Pdf the theory of optimal income taxation researchgate. The seminal paper dealing with this problem is mirrlees 1971, and mirrleesian taxation has been identified with the distributional and incentive role of taxation. Applied economists like seligman wrote widely translated and read books and reports. 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. The papers centred on asymmetric information, which determines the extent to which they should affect the optimal rate of saving in an economy. An important counterintuitive result of the mirrlees model is that the highest marginal tax rate is imposed on low income level and the marginal tax. A reexamination of the optimal nonlinear income tax udo ebert institute of economics, university of oldenburg, p. We emphasize connections between theory and empirical work that were initially lacking from optimal income tax theory. Back in 1971, a scottish economist by the name of james a.

Call an individual whose abilityparameter is n an nman. Mirrlees 1971 model is a milestone in the study of optimal nonlinear taxation of. Atkinson and stiglitz 1976 extended income tax model proposed by the mirrlees 1971. To this end, this paper reassesses optimal tax policy in the celebrated mirrlees 1971 model. A brief discussion of considerations of equity is offered in section 5 and concluding remarks in section 6. 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. For a simpler and clearer version of the model see diamond 1998, and for a thorough discussion of their properties see saez 2001. The second welfare theorem tells us that any pareto e cient allocation can be. An exploration in the theory of optimum income taxation. The methodology has since become the standard in the field. 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. He published a book on this topic in 1990 entitled optimal income tax and redistribution oup. The consumption choice of an nman is denoted by x, y. He developed the theory of optimal income taxation and in so.

Mirrlees meets ramsey jonathan heathcotey federal reserve bank of minneapolis and cepr hitoshi tsujiyamaz goethe university frankfurt august 27, 2019 abstract what is the optimal shape of the income tax schedule. Sir james mirrlees has been influential in several areas. In the classical framework initiated by mirrlees 1971, the theory studies the maximization of a utilitarian social welfare function by a. Comprehensive description in gruber undergrad textbook. In his model, individuals have identical utility functions but differ in their skills and pretax wage rates. Even in a highly socialist economy, where all who work are employed by the state, the shadow price of highly skilled. Therefore, the optimal taxation problem not only involves dealing with redistribution of income and changes in incentives but also with one informational friction.