with George-Marios Angeletos
We study the implications of rationally inattentive behavior for the design of optimal taxes. Our main finding is an irrelevance result– when inattention satisfies two key properties, “invariance” and “state separability”, optimal taxes satisfy exactly the same type of sufficient-statistics formula as that found in classical public finance. Away from this benchmark, inattention can lead to novel considerations for the design of optimal taxes. First, violations of state-separability generate interdependence of the optimal taxes across states. Second, violations of invariance help accommodate the idea that market may be excessively complex, even when firms are perfectly competitive. Finally, we clarify that inattention does not necessarily make agents less responsive and may thus call for lower taxes.