Standard optimal tax models typically ignore reference-dependent behavior induced by institutional thresholds. This paper incorporates loss aversion into a Mirrlees optimal income tax framework to analyze how such exogenous reference points, unlike social comparisons, alter optimal redistribution. I show that institutional loss aversion calls for globally higher marginal tax rates and a quantitatively large expansion of the lump-sum transfer. To accommodate behavioral bunching at the reference point, I employ an ironing approach and derive a modified optimal tax formula that remains valid in the presence of a mass point. Simulations calibrated to the U.S. economy imply that the optimal lump-sum transfer increases by 19-32% and yield welfare gains equivalent to 5.8-7.5% of consumption. These results are robust under both paternalistic and non-paternalistic welfare criteria.

Standard optimal tax formulas treat the equity-efficiency tradeoff as independent of how taxation reshapes social comparisons. When aspirations are socially determined, reforms that shift the income distribution move individuals' reference points, creating additional welfare and revenue effects beyond the classic labor-leisure margin. I embed endogenous aspirational thresholds in a Mirrleesian model and derive sufficient-statistics formulas for optimal linear and nonlinear income taxes. The key new statistic is an aspiration elasticity: the response of taxable income to a change in aspirations, which governs whether higher aspirations motivate or frustrate effort. Using a U.S. online information-provision experiment with hypothetical choice scenarios, I estimate this elasticity to be 0.10-0.25 and find that aspirations predominantly motivate across the income distribution. Consistent with these estimates, standard formulas can overstate optimal progressivity. The framework also characterizes when pay-transparency policies raise welfare by correcting misperceptions and increasing the salience of reference incomes.

This paper studies optimal income taxation with endogenous wages and extensive-margin labor supply, focusing on how production structure and profit-share heterogeneity shape optimal tax policy. We show that under CRS, under DRS with full profit taxation, or when profit shares are uncorrelated with productivity, the classic extensive-margin optimal tax rule continues to hold despite endogenous wages. By contrast, under DRS without full profit taxation and with productivity-dependent profit shares, the optimal rule must incorporate general equilibrium effects operating through wages and profits. Numerical simulations based on CES production functions indicate that negative employment tax rates, or in-work benefits, are often optimal for low-income workers, and that redistribution strengthens as decreasing returns become more pronounced and profit shares more unequal. Overall, optimal employment tax design depends not only on wage inequality and labor supply responses, but also on the distribution of profit income across worker types.

The optimal tax literature ignores that, across the world, redistribution towards the poor mainly happens via welfare transfers with take-up rates far below 100%. This paper provides the first comprehensive analysis of tax-transfer systems composed of mandatory income taxes and optional transfer programs. We develop a theoretical model that (a) allows for heterogeneity in productivity and take-up costs and (b) accounts for responses at the take-up margin and both margins of labor supply. We derive empirically applicable formulas that specify (i) conditions for the existence of Pareto-improving reforms of taxes, transfers, or both, (ii) the inverse optimum weights of transfer recipients and non-recipients that make an observed safety net optimal, (iii) the optimal tax rates and transfer phase-out rates. We apply these formulas to show that the tax-transfer system of Germany and Sweden are inefficient: There exist transfer reforms that make all recipients better off while increasing net tax revenue.