Diamond-Mirrlees meets Sims: Optimal Taxation with Rational Inattention

We study optimal commodity taxation in economies with inattentive consumers. In our setting, consumers may make both random and systematic mistakes relative to the frictionless benchmark; they may allocate attention differently across markets; they may exhibit behavior akin to sparsity or mental accounting. Inattention is however rational (Sims, 2003). This delivers an irrelevance result — optimal taxes may satisfy the same sufficient-statistics formulas as those in classical public finance (Ramsey, 1927; Diamond and Mirrlees, 1971b; Diamond, 1975). Put simply, a benevolent Ramsey planner should not care whether agents are inattentive or what’s “under the hood” of the observed market-level demands. We discuss the conditions that sustain this result, its possible violations, and its relation to behavioral public finance.