Nonlinear income taxes and linear commodity taxes are analyzed when people differ with respect to ability, high-skill agents have heterogeneous preferences, and neither individual abilities nor preferences are observable. We characterize pure income tax optima, which may be bunching or...

The analysis of the marginal cost of public funds is extended to the simple two-type, income tax model where individual skill is private information. The marginal cost is related to the prevailing distortions and properties of individual preferences. A division of a tax increase is identified...