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Mirrlees meets Diamond-Mirrlees

Author

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  • Florian Scheuer
  • Iván Werning

Abstract

We show that the Diamond and Mirrlees (1971) linear tax model contains the Mirrlees (1971) nonlinear tax model as a special case. In this sense, the Mirrlees model is an application of Diamond-Mirrlees. We also derive the optimal tax formula in Mirrlees from the Diamond-Mirrlees formula. In the Mirrlees model, the relevant compensated cross-price elasticities are zero, providing a situation where an inverse elasticity rule holds. We provide four extensions that illustrate the power and ease of our approach, based on Diamond-Mirrlees, to study nonlinear taxation. First, we consider annual taxation in a lifecycle context. Second, we include human capital investments. Third, we incorporate more general forms of heterogeneity into the basic Mirrlees model. Fourth, we consider an extensive margin labor force participation decision, alongside the intensive margin choice. In all these cases, the relevant optimality condition is easily obtained as an application of the general Diamond-Mirrlees tax formula.

Suggested Citation

  • Florian Scheuer & Iván Werning, 2016. "Mirrlees meets Diamond-Mirrlees," NBER Working Papers 22076, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22076
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    Cited by:

    1. Hellwig, Christian & Werquin, Nicolas, 2022. "A Fair Day's Pay for a Fair Day's Work: Optimal Tax Design as Redistributional Arbitrage," TSE Working Papers 22-1284, Toulouse School of Economics (TSE), revised Jan 2023.
    2. Dominik Sachs & Aleh Tsyvinski & Nicolas Werquin, 2020. "Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium," Econometrica, Econometric Society, vol. 88(2), pages 469-493, March.
    3. Florian Scheuer & Joel Slemrod, 2020. "Taxation and the Superrich," Annual Review of Economics, Annual Reviews, vol. 12(1), pages 189-211, August.
    4. Laurence Jacquet & Etienne Lehmann, 2023. "Optimal tax problems with multidimensional heterogeneity: a mechanism design approach," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 60(1), pages 135-164, January.
    5. Kevin Spiritus & Etienne Lehmann & Sander Renes, "undated". "Optimal Taxation with Multiple Incomes and Types," Tinbergen Institute Discussion Papers 22-000/IVI, Tinbergen Institute.
    6. Paweł Doligalski & Abdoulaye Ndiaye & Nicolas Werquin, 2023. "Redistribution with Performance Pay," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 1(2), pages 371-402.
    7. Bas Jacobs & Rick van der Ploeg, 2017. "Should Pollution Taxes be Targeted at Income Redistribution?," CESifo Working Paper Series 6599, CESifo.
    8. Aleh Tsyvinski & Nicolas Werquin, 2017. "Generalized Compensation Principle," NBER Working Papers 23509, National Bureau of Economic Research, Inc.
    9. Renato Gomes & Jean-Marie Lozachmeur & Alessandro Pavan, 2018. "Differential Taxation and Occupational Choice," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 511-557.
    10. Alexander Tarasov & Robertas Zubrickas, 2021. "Optimal Income Taxation under Monopolistic Competition," CESifo Working Paper Series 9309, CESifo.
    11. Rothschild, Casey, 2019. "Screening with convex menus and optimal flow taxation," Journal of Public Economics, Elsevier, vol. 178(C).
    12. Lensman, Todd & Troshkin, Maxim, 2022. "Implications of uncertainty for optimal policies," Journal of Economic Theory, Elsevier, vol. 199(C).
    13. Jacobs, Bas & van der Ploeg, Frederick, 2019. "Redistribution and pollution taxes with non-linear Engel curves," Journal of Environmental Economics and Management, Elsevier, vol. 95(C), pages 198-226.

    More about this item

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor

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