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"The Optimal Distribution of Income Revisited,"
This paper revisits the optimal distribution of income model in Fair (1971).
This model is the same as in Mirrlees (1971) except that education
is also a decision variable and tax rates are restricted to lie on a
tax function. In the current paper the tax-rate restriction is relaxed. As in
Fair (1971), a numerical method is used. The current
method uses the DFP algorithm
with numeric derivatives. Because no analytic derivatives have to be taken,
it is easy to change assumptions and functional forms and run alternative
experiments. The sensitivity of the results to the four main
assumptions of the model are examined.
Gini coefficients are computed, which provides a metric for
comparing the redistributive effects under different assumptions. Ten
optimal marginal tax rates are computed per experiment corresponding to ten tax
This paper also argues that the widely used specification of a
quasi-linear utility function---a utility function with no income
effects---is not realistic. It requires for solution of the overall model
large differences in utility functions across individuals of different