way?
A: "Bunching" is referred to as the case when individuals of different
abilities earn the same income. It may happen at the lower ability level
(see Lecture 4, Theorem 5.3) but not at the high ability level (Theorem
5.10). Therefore it is expected to change the optimal tax schedule at
the lowest income level. Indeed according to Theorem 5.9 the marginal
tax rate at the lowest income (0.0001) is no longer zero but positive.
(b)What is characteristic about the social welfare function that is being
used?
A: It is a function of individuals' utilities only, not things like say income
distribution, level of national income, or level of employment. The only
way in which the latter matter is indirectly through individuals' utilities.
When we maximise a Bergson-Samuelson welfare function we do not
care about those things per se, only to what extent they affect utilities.
(c) One result is "no-distortion at the top". What does it mean? Why seems
it not to be satisfied in the numerical computations?
A: It means that the marginal income tax at the highest income level is
zero. In numerical computations the assumed distribution of skills
normally is assumed to be log-normal. For this distribution the highest
ability is infinite, therefore we could only get the zero-marginal-tax
result for infinite incomes in these studies.
(d) How can the optimal tax schedule generate unemployment? How come
this may be optimal?
A: Some individuals may choose not to work because of a lump sum
benefit in the optimal tax system (this is like an "unemployment
benefit", but everybody, regardless working or not, gets it). If some are
not going to work, it makes sense that the low skilled do not.
(e) What is the information asymmetry
government in the Mirrlees model?
between
individuals
and
A: Individuals know their own skill level (and wage rate), the government
can only observe the total income earned (wage times hours worked).
END