Static and Dynamic Mirrleesian Taxation with Non-separable Preferences: A Unified Approach

Abstract

I analyze dynamic Mirrlees taxation with preferences that are non-separable between con- sumption, leisure and type, which determines both ability and consumption needs. I show how to account for non-separable preferences through a simple change in probability measures. I ge- neralize the existing Inverse Euler Equation and optimal static labor tax formulae and provide a unied intuition based on a set of perturbations around the optimal allocations that preserve expected utility and incentive compatibility. Non-separability in preferences gives rise to a new tradeo between current and future redistribution that is internalized by the planner's solution but not by private savings decisions. This leads to a novel rationale to subsidize (tax) savings and make labor taxes more (less) persistent, when more productive agents also have higher (lower) consumption needs.

Reference

Christian Hellwig, “Static and Dynamic Mirrleesian Taxation with Non-separable Preferences: A Unified Approach”, TSE Working Paper, n. 21-1224, June 2021.