Public Finance, 3rd Edition

The Social Welfare Implications of Any Given Change in Taxes

Once the optimal commodity tax problem had been fully developed by Diamond and Mirrless in the late 1960s, public sector economists turned their attention to more realistic forms of restricted taxation. This opened up two new major lines of research in the 1970s. One group of economists adopted the basic model for optimal commodity taxation and attempted to develop theorems on optimal changes (or levels) of taxes for a subset of the goods and factors (e.g., Dixit, Guesnerie, and Hatta).¹⁹ A second group, following the lead of James Mirrlees and Ray Fair in 1971, concentrated specifically on optimal income taxation (e.g., Mirrlees, Fair, Sheshinski, Atkinson, Stiglitz, Sadka, Stern, and ...