Optimal nonlinear taxation: a simpler approach

Abstract The typical method of solving for the optimal nonlinear tax schedule relies on deriving incentive-compatible allocations. While this “primal approach” is mathematically rigorous, it lacks intuitive appeal. This paper considers a different that directly system. “dual much closer to actual policy as centers around welfare effects reforms. I show can easily incorporate preference heterogeneity, well individual utility misoptimization. Beyond system, dual approach allows one obtain insights into small reforms outside optimum.