Access Frictions, Optimal Redistribution, and the Bias in Standard Tax Rate Computations

Standard optimal income tax theory assumes that disposable resources translate directly intoindividual welfare. In reality, accessing markets, public services, and transfer programs requireseffort, information, and resources that are themselves scarce and more scarce at the bottom ofthe income distribution. We introduce access frictions into a Mirrleesian framework by modelinga smooth wedge between disposable income and effective consumption. The wedge is governedby an intensity index π(a, c) that depends on the household’s disposable income c and on a costlygovernment instrument a that captures the quality of service delivery, administrative design,and program accessibility. We characterize optimal income taxation in this environment throughfour sets of results. First, a Saez-style top-bracket formula in which frictions enter throughtwo channels: welfare weights are rescaled by the marginal effectiveness m(a, c) = ∂˜c/∂c, andbehavioral responses are governed by the elasticity of earnings with respect to the compositeincentive shifter s = (1 − T ′) · m rather than the statutory net-of-tax rate alone. Second, underquasi-linear preferences, a full-distribution formula that nests the top-bracket result and showsthat benchmark computations abstracting from frictions overstate optimal marginal rates atevery income level. Third, a participation tax formula in the spirit of Saez [2002], showingthat access frictions attenuate the effective participation gain and bias standard Earned IncomeTax Credit (EITC)-style analyses in a direction that depends on whether frictions are moresevere in employment or non-employment. Fourth, a characterization of the jointly optimal taxschedule and access policy, establishing that the optimal level of access investment rises withincome inequality under a mild curvature condition consistent with standard parameterizationsof preferences. We complement the theoretical analysis with a calibration exercise that pins downthe friction gradient γ = mc · c/m from experimental and survey evidence on administrativeburdens and program take-up. Across a wide range of standard parameter values, the frictioncorrection reduces the implied optimal top marginal tax rate by 1.5 to 4.5 percentage points, andcompresses the U-shaped rate schedule most strongly at the bottom of the income distribution,where frictions are steepest.