Intern
Chair of Public Finance

Optimal Tax Theory

Contents & Objectives:

This course introduces the basic concepts and approaches of optimal taxation theory. The optimal design of a tax system is an extremely important topic not only for theorists but also for policy makers. During past decades, the tax theory literature has shaped our thinking about the role and the limitations of the government in a market-oriented economy. It has highlighted the central trade-off between equity and efficiency and permitted their joint analysis in applied economic models. It has stressed the role of asymmetric information and the close connection between redistribution and insurance. Finally, the rigorous formulation of the optimal tax problem in a general equilibrium framework provided the foundation for computable general equilibrium models which are now used to study applied policies.

Ultimately, the course is designed to introduce students to important research papers published in this area. For this reason, Lecture Notes are provided that derive the central analytical techniques and results of the considered papers in detail. In principle, these notes should be sufficient to understand the theory. However, (more ambitious) students are also encouraged to consult the original studies and also related studies. The course is accompanied by the seminar “Topics in Optimal Tax Theory” in the following semester, where students can prepare and present a thesis based on a specific paper and/or topic of the course. In addition, the course also provides some theoretical basis for the course “Advanced Computational Economics”.    

Course Structure:

  1. Basic Microeconomic Concepts: Marshallian and Hicksian demand, income and substitution effects, social welfare function
  2. Optimal indirect taxation in the Ramsey tradition
    1. Rules for commodity taxation
    2. Consumption taxation with externalities
    3. Consumption taxation with home production
  3. Optimal direct taxation in the Mirrlees tradition

3.1. The linear income tax

3.2 The non-linear income tax

3.3 Taxation of families

      4.   Optimal taxation with labor market risk

            4.1 Taxation with uncertain labor income

            4.2 Optimal social security design

            4.3 Optimal social insurance and redistribution

       5.  Optimal taxation over tim

 

  

Prerequisites:

Students that attend this course should have some basic knowledge in microeconomic theory.

Literature:

Boadway, R. (2012): From Optimal Tax Theory to Tax Policy, Munich Lectures in Economics, Cambridge and London: MIT Press.

Jacobs, B. (2013): From optimal tax theory to applied tax policy, FinanzArchiv 68(3), 338-389.

Mankiw, N.G., M. Weinzierl and D. Yagan (2009): Optimal taxation in theory and practice, Journal of Economic Perspectives 23(4), 147-174.

Sörensen, P.B. (2010): The theory of optimal taxation: New developments and policy relevance, Nationalokonomisk Tidsskrift 148, 212-244.

Tresh, R.W. (2015): Public Finance: A Normative Theory, 3rd. edition, (Ch. 13-15).

Tuomala, M. (2016): Optimal Redistributive Taxation, Oxford: Oxford University Press.

Grading:

There will be an optional midterm examination and a 60 min final exam. Those who take the midterm exam (which could be a paper presentation) can only improve their final grade. The weight for the final grade is in this case 1:3 (midterm: final exam).