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Mirrlees meets Diamond-Mirrlees


Scheuer, Florian; Werning, Iván (2016). Mirrlees meets Diamond-Mirrlees. NBER Working papers 22076, NBER.

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.

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.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:D6, D8, E6, H2, J2
Language:English
Date:March 2016
Deposited On:11 Aug 2017 12:49
Last Modified:02 Feb 2018 12:30
Series Name:NBER Working papers
Number of Pages:33
OA Status:Green
Publisher DOI:https://doi.org/10.3386/w22076
Related URLs:http://www.nber.org/papers/w22076

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