The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution

This paper can be interpreted in one of two ways. Some readers can take it as a small, quirky contribution aimed to clarify the literature on optimal income taxation. Others can take it as a broader effort to challenge that entire literature. In particular, our results can be seen as raising a fundamental question about the framework for optimal taxation which remains a centerpiece of modern public finance and for which William Vickrey (1945) and J. A. Mirrlees (1986) won the Nobel Prize. More than a century ago, F. Y. Edgeworth (1897) pointed out that a utilitarian social planner with full information will be completely egalitarian. More specifically, the planner will equalize the marginal utility of all members of society. If everyone has the same separable preferences, equalizing marginal utility requires equalizing after-tax incomes as well. Those endowed with greater than average productivity are fully taxed on the excess, and those endowed with lower than average productivity get subsidies to bring them up to average. Vickrey (1945) and Mirrlees (1971) emphasized a key practical difficulty with Edgeworth’s solution. The government does not observe innate productivity. Instead, it observes income, which is a function of productivity and effort. The social planner with such imperfect information has to limit his utilitarian desire for the egalitarian outcome, recognizing that too much redistribution will blunt incentives to supply effort. The Vickrey-Mirrlees approach to optimal nonlinear taxation is now