Inequality and Optimal Redistribution
From the 1980s onward, income inequality
increased in many advanced countries. It is very difficult to account for the rise in income inequality using the standard
labour supply/demand explanation. Fiscal redistribution has become less effective in compensating increasing inequalities
since the 1990s. Some of the basic features of redistribution can be explained through the optimal tax framework developed
by J. A. Mirrlees in 1971. This Element surveys some of the earlier results in linear and nonlinear taxation and produces
some new numerical results. Given the key role of capital income in the overall income inequality, it also considers the optimal
taxation of capital income. It examines empirically the relationship between the extent of redistribution and the components
of the Mirrlees framework. The redistributive role of factors such as publicly provided private goods, public employment,
endogenous wages in the overlapping generations model and income uncertainty are analysed.
1. Introduction; 2. Optimal
linear labour income taxation; 3. The optimal nonlinear labour income tax; 4. Optimal top marginal rates and quasi-linear
preferences in consumption; 5. Numerical optimal nonlinear tax schedules; 6. Optimal separable capital income and labour income
taxation; 7. The empirical relationship between the extent of redistribution and the components of the Mirrlees framework;
8. Other considerations on redistribution; 9. Conclusions.
Examines the relationship between the extent of redistribution
and the components of the Mirrlees framework.