International Journal of Business and Social Science

ISSN 2219-1933 (Print), 2219-6021 (Online) DOI: 10.30845/ijbss

Economy and Asymmetric Information: Mirrleesian Optimal Taxation as an Asymmetric Information Problem
Dushko Josheski, Tatjana Boshkov, Aleksandra Zezova

In this paper Mirrleesian optimal taxation will be reviewed. Models in optimal tax theory typically posit that the tax system should maximize a social welfare function subject to a government budget constraint, considering how individuals respond to taxes and transfers. James Mirrlees (1971) launched the second wave of optimal tax models by suggesting a way to formalize the planner’s problem that deals explicitly with unobserved heterogeneity among taxpayers.There are static and dynamc versions of this model and we will review them or introduce them in this paper. Social welfare is larger when resources are more equally distributed, but redistributive taxes and transfers can negatively affect incentives to work and earn income in the first place. This creates the classical trade-off between equity and efficiency which is at the core of the optimal labor income tax problem.We will describe main theoretical findings in this literature as well as numerical examples with their policy implications.

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