Uppsala Center for Fiscal Studies

Using the Mirrlees optimal income tax model, with no income e¤ects on labour supply, this article shows that the discrete population approach provides new insights into the characterization of the optimal tax system, which complements the previous …ndings. The analysis is based on the "Spence-Mirrlees wedge" which corresponds, at each observed gross income level, to a ratio between the marginal tax rate of the individual for whom the bundle is designed and that of his nearest more productive neighbour if he chooses to mimic. Using this wedge, a necessary and su¢ cient condition for bunching to be optimal is obtained in terms of the primitives of the model, separating optima are characterized geometrically, and comparative statics properties derived, notably with respect to skill levels and individual social weights. It is then shown that the analysis extends to adverse-selection problems where participation constraints replace the tax revenue constraint. Keywords: Optimal Tax, Income Tax, Nonlinear Pricing, Adverse-Selection, Comparative Statics. JEL classi…cation: D82; D86; H21; H31. I would like to thank two anonymous reviewers, the editor, Craig Brett, Antoine d’Autume, Julia Cagé, Guy Gilbert, Laurence Jacquet, Guy Laroque, Jacques Le Cacheux, Etienne Lehmann, Pierre Pestieau, Alain Trannoy, Gwenola Trotin and John A. Weymark for their very helpful comments. The usual caveat applies. yUppsala University, Department of Economics, P.O. Box 513, SE-75120 Uppsala, Sweden. E-mail: [email protected]