CREST Microeconomics Seminar : 

Abstract:
Following the tradition of Mirrlees (1971), static optimal income taxation problems are typically concerned with public redistribution by the State between independent individuals or couples. This paper is the first to depart from this independence assumption and to account for the interaction between public redistribution and private transfers occurring between individuals within their familial and social networks. Here, individuals value the private utilities of their group’s members and differ in their productivity levels. As a result, they have two dimensions of choice: their productive effort and the transfers they make to other members of their network. I characterize theoretically the optimal linear and non-linear income tax schemes in this context and provide sufficient statistics formulas for both, which highlight how tax design is affected by the existence of altruistic private transfers. I show that public and private redistribution are substitutes but at the optimum, private transfers are only partially crowded-out: the government may rely on these transfers to achieve its equity objective. Depending on the structure of groups, taking into account private redistribution may induce large efficiency gains – a finding I illustrate using numerical simulations. These novel insights can then be applied to a variety of settings, such as those of family taxation and of taxation in developing countries, for which I document the structure and nature of informal transfers using the World Bank’s Living Standard Measurement Surveys.