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Journal Article

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

Felix J. Bierbrauer and Pierre C. Boyer
Annals of Economics and Statistics
No. 113/114, SPECIAL ISSUE ON THE ECONOMICS OF TAXATION (June 2014), pp. 185-206
Published by: GENES on behalf of ADRES
DOI: 10.15609/annaeconstat2009.113-114.185
Stable URL: http://www.jstor.org/stable/10.15609/annaeconstat2009.113-114.185
Page Count: 22
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The Pareto-Frontier in a Simple Mirrleesian Model of Income Taxation
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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 goods. JEL: H21, H41, D82. / KEY WORDS: Optimal Income Taxation, Laffer-Curve, Public-Good Provision.

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