Tax policies are informed by principles developed in the tax theory
and policy literature. This Element surveys the policy lessons that
emerge from optimal tax analysis since the 1970s. This Element
begins with the evolution of tax policy principles from the
comprehensive income approach to the expenditure tax approach to
normative tax analysis based on social welfare maximization and
recounts key results from the optimal income tax analysis inspired
by Mirrlees and extended by Diamond to the extensive margin
approach. This Element also emphasizes analytical techniques that
yield empirically relevant concepts and show the equity-efficiency
trade-off at the heart of tax policy. We also extend the analysis
to recent literature incorporating involuntary unemployment, and
policies like welfare and unemployment insurance.
General
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