Remarks on the Utilitarian Approach to Optimal Taxation

Abstract

We show using elementary arguments that the utilitarian approach to optimal taxation leads to results that are very sensitive to the underlying formulation of the problem. In particular, we argue that there are legitimate optimal taxation problems that admit solutions of a different form than normally believed. Specifically, in this paper we provide a proof that the optimal marginal tax rates can be equal to zero for all but a measure zero set of income levels, i.e., we argue that the first order conditions derived by Mirrlees need not identify the true optima properly. Furthermore, we argue that relying on welfare functions defined with individual utilities generates internal inconsistencies and ambiguities that can be only be logically be resolved by allowing for optimal taxation problems that nearly automatically admit step functions as solutions. Our findings put into question the applicability of the utilitarian approach to optimal taxation as a basis for practical policy guidance.