Optimal Income Taxation, Public Goods Provision and Robust Mechanism Design

Abstract

This paper extends the model of optimal income taxation due to Mirrlees (1971) and includes private information on public goods preferences. A mechanism design approach is used to establish the following result: If policies are required to be robustly implementable in the sense of Bergemann and Morris (2005), then the optimality conditions in the extended model with uncertainty about tax and expenditure policies, are the same as in the standard model of optimal income taxation. The paper provides a foundation for a widely used assumption in public finance, namely that individuals optimize their behaviour subject to a predetermined and commonly known tax system.