A Revelation Approach To Optimal Taxation

Abstract

Since the seminal work of Ramsey (1927) and especially Diamond and Mirrlees (1971), a large body of literature has striven to identify rules characterizing optimal tax structures. The fundamental limitation of such an approach has been the lack of information necessary to implement the rules derived in the optimal tax literature. This article offers an alternative approach to the optimal tax problem. The authors present a mechanism that induces individuals to honestly reveal the total tax burden they bear under alternative tax structures. Under certain conditcons, the mechanism could conceptually be used to find Ramsey's solution to optimal commodity taxation. The article also illustrates how the revelation approach can be operationalized by experiments designed to test theorems derived m the optimal tax literature.