Department of Mathematics

Michigan State University, Dept. of Economics

Optimum Income Taxation

**Proposer/Liaison: Charles Ballard, Ph.D.

In 1971, J. A. Mirrlees authored an influential paper* in which he explores an optimal tax rate structure for an income tax. Mirrlees builds a model of an economy not unlike that found in America. Several simplifying assumptions are made. Results are obtained through maximizing an objective function for social welfare by choosing tax rates. He finds that optimal tax rates are surprisingly flat. It is speculated that his findings result from a poorly specified model and are subject to a “garbage in, garbage out” phenomena. In particular, it is believed that Mirrlees has used a poorly specified individual work decision given government tax policy.

The ideal project deliverable would consist of a computer program that models an economy like that of Mirrlees. This model will duplicate the results found in Mirrlees paper. Assumptions used by Mirrlees will then be changed to assumptions that are no less reasonable and the model’s results will then be compared to those found by the author in 1971. *Mirrlees, J. A., “An Exploration in the Theory of Optimum Income Taxation,” The Review of Economic Studies, Volume 38, Issue 2 (April 1971), 175-208.

**Summary prepared by Charles Ballard, Ph.D.

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