We study the optimal inflation tax in an economy with heterogeneous agents subject to nonlinear taxation of labor income. We find that the Friedman rule is Pareto efficient when combined with a nondecreasing labor income tax. In addition, the optimum for a utilitarian social welfare function lies on this region of the Pareto frontier. The welfare costs from inflation are bounded below by the area under the demand curve. (c) 2008 by The University of Chicago. All rights reserved..

Whether human capital increases or decreases wage uncertainty is an open question from an empirical standpoint. Yet, most policy prescriptions regarding human capital formation are based on models that impose riskiness on this type of investment. In a two period and finite type optimal income taxation problem we derive prescriptions that are robust to the risk characteristics of human capital: savings should be discouraged, human capital investments encouraged and both types of investment driven to an efficient level from an aggregate perspective. These prescriptions are also robust to the assumptions regarding what choices are observed, despite policy instruments being not.

We assess the gains attained by the introduction of age-dependent labor income taxes in an overlapping generations economy where individuals live a meaningful life cycle and endogenously accumulate human capital. The model is sufficiently rich to isolate the role of general equilibrium effects, credit market imperfections, and different forms of human capital accumulation. The large welfare gains we obtain cannot be attained without age dependence, nor can they be attained with age-dependent taxes if progressivity of labor income taxes and capital income tax rates are not suitably adjusted to profit from the complementarity of these instruments.

We study optimal labor income taxation in non-competitive labor markets. Firms offer screening contracts to workers who have private information about their productivity. A planner endowed with a Paretian social welfare function tries to induce allocations that maximize its objective. We provide necessary and sufficient conditions for implementation of constrained efficient allocations using tax schedules. All allocations that are implementable by a tax schedule display negative marginal tax rates for almost all workers. Not all allocations that are implementable in a competitive setting are implementable in this noncompetitive environment.

In an economy which primitives are exactly those in Mirrlees (1971), we investigate the efficiency of labor income tax schedules derived under the equal sacrifice principle. Starting from a given government revenue level, we use Werning's (2007b) approach to assess whether there is an alternative tax schedule to the one derived under the equal sacrifice principle that raises more revenue while delivering less utility to no one. For our preferred parametrizations of the problem we find that inefficiency only arises at very high levels of income. We also show how the multipliers of the Pareto problem may be extracted from the data and used to find the implicit marginal social weights associated with each level of income. Keywords: Equal Sacrifice; Efficiency. J.E.L. codes: H2; D63. * This paper has circulated under the title Sacrifice and Efficiency of the Income Tax Schedule. We thank Luis Braido, Ricardo Cavalcanti, Bev Dahlby and participants at INSPER, EESP-FGV, the 2011 PET Meeting, the 67th IIPF Meeting and the 2012 ESEM Meeting for their invaluable comments. We retain full responsibility for all remaining errors. Carlos da Costa thanks the hospitality of MIT, and gratefully acknowledges financial support from CNPq. First Version: July, 2010.