Mirrlees Model
Updated 2026-08-05
INTRODUCTION
English translation pending.
CORE DEFINITION
A model of optimal income taxation developed by James Mirrlees. The government cannot observe individual ability, only realised income, so the tax schedule must be incentive compatible: high earners must prefer honest reporting to imitation or withdrawal. Maximising social welfare subject to that constraint balances redistribution against the incentive cost of high marginal rates. A notable implication is that optimal marginal rates follow an inverted-U shape, with lower rates at the very top, since taxing elite earnings heavily destroys the output and revenue it is meant to capture.
SCAFFOLDING EFFECT
Reduce cognitive load
- Incentive Screen: check that honest reporting beats concealment at every income level. - Rate Shaping: expect marginal rates to fall at the extremes rather than rise throughout. - Redistribution Route: use transfers and base broadening instead of relying only on top rates.
Anchor fast decisions
Since ability is private information, any tax schedule can condition only on reported income. A very high top marginal rate invites avoidance, emigration or reduced effort, so the revenue it appears to raise shrinks in practice. At the bottom, high withdrawal rates on benefits can eliminate the gain from working. The welfare optimum therefore sets rates where the redistribution gained per dollar still exceeds the efficiency lost, which produces the inverted-U profile.
MINIMUM ACTION
In progress 0/1Practice this model in one real situation:
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Source support: Explicit
- en.wikipedia.orghttps://en.wikipedia.org/wiki/James_Mirrleesverified
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