Optimal Income Taxation: Mirrlees Meets Ramsey

Jonathan Heathcote and Hitoshi Tsujiyama

No 507, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: What structure of income taxation maximizes the social benefits of redistribution while minimizing the social harm associated with distorting the allocation of labor input? Many authors have advocated scrapping the current tax system, which redistributes primarily via marginal tax rates that rise with income, and replacing it with a flat tax system, in which marginal tax rates are constant and redistribution is achieved via non-means-tested transfers. In this paper we compare alternative tax systems in an environment with distinct roles for public and private insurance. We evaluate alternative policies using a social welfare function designed to capture the taste for redistribution reflected in the current tax system. In our preferred specification, moving to the optimal flat tax policy reduces welfare, whereas moving to the optimal fully nonlinear Mirrlees policy generates only tiny welfare gains. These findings suggest that proposals for dramatic tax reform should be viewed with caution.

Keywords: Mirrlees taxation; Optimal income taxation; Tax progressivity; Private insurance; Flat tax; Social welfare functions; Ramsey taxation (search for similar items in EconPapers)
JEL-codes: E62 H21 H23 H31 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2015-01-22
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Optimal Income Taxation: Mirrlees Meets Ramsey (2021)
Working Paper: Optimal Income Taxation: Mirrlees Meets Ramsey (2015)
Working Paper: Optimal Income Taxation: Mirrlees Meets Ramsey (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:507

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