Multi-dimensional Heterogeneity and the Design of Tax Policies
Multi-dimensional Heterogeneity and the Design of Tax Policies

Summary/Abstract: This paper surveys some recent contributions which have revisited the design of optimal policy mix when individuals differ in several characteristics. Because of the technical difficulties raised by multidimensional screening models the specification of tractable taxation models has long been neglected. This is certainly a serious omission because the underlying policy issues are of considerable importance for the policy design in today’s welfare states. The main lesson that emerges is that the design of redistributive policy is not as “simple” as the Atkinson and Stiglitz theorem suggests. Policy makers should not concentrate on a single instrument (labor income taxation). While the optimal design of the income tax is certainly a significant ingredient of the overall policy mix, it is not the only relevant instrument. The optimal policy mix may very well rely on a large number of instruments including capital income tax, social insurance and housing policies.

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