On income taxation and the core

The core of an (optimal) income tax economy is examined. In such economies, optima are usually second best because the identities of the agents are not known to the government. Although it is generally unclear how to handle information problems in cooperative games such as the one examined here, two core concepts are explored. For the first concept, incentive compatibility is imposed only within potential blocking coalitions, and the core consists only of head taxes or is empty if there are no increasing returns to coalition size. For the second concept, incentive compatibility is also imposed for potential entrants into blocking coalitions, and the core is shown to be empty for a simple, reasonable, and interesting class of models.