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Welfare, Incentives, and Taxation by James Mirrlees

Welfare, Incentives, and Taxation by James Mirrlees

Author:James Mirrlees [Mirrlees, James]
Language: eng
Format: epub
Published: 0101-01-01T00:00:00+00:00


11

The Theory of Optimal Taxation

1. ECONOMIC THEORY AND PUBLIC POLICY

A good way of governing is to agree upon objectives, discover what is possible, and optimize. At any rate, this approach is the subject of optimal tax theory. From this point of view, `optimal tax theory' is an unduly narrow term to describe the subject, but it is neater than `theory of optimal public policy'. In any case, I shall not be discussing the optimization of macroeconomic models, which are used to treat several aspects of public policy. Much-though not all-of what has so far been done in optimal tax theory uses the standard model of competitive equilibrium, with rational consumers and profit-maximizing, price-taking firms. In this way, one avoids debate about the dubious relationships of disequilibrium macroeconomics or oligopoly theory, and concentrates on essentials.

The central element in the theory is information. Public policies apply to individuals only on the basis of what can be publicly known about them. There is little difficulty about paying the same subsidy to every individual in the economy: there is not much more difficulty in making the subsidy depend on age. Uniform positive taxes may be a little more difficult. Taxes and subsidies proportional to trade in specified goods or services may also be difficult to administer with perfect accuracy. But, subject to some minor imperfections, we can take it that most such taxes use information that is cheaply and publicly available. Not all conceivable public policies have this convenient property. One of the basic theorems of welfare economics asserts that, where a number of convexity and continuity assumptions are satisfied, an optimum is a competitive equilibrium once initial endowments have been suitably distributed. To make such a distribution requires, in general, complete information about individual consumers, for the transfers must be lump-sum in character, that is, independent of the individual's behaviour. It is generally agreed by economists that the lump-sum transfers necessary to achieve an optimum are scarcely ever feasible.' There is no way of obtaining the information about individuals that is required except in a society of individuals who are truthful regardless of selfish considerations. A theorem supporting this view is given in Section 3 below.



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