Probably the finest moment in the working life of Sir James Mirrlees came in 1968 when, he recalled, “I finally cracked the optimal tax problem … it came in a flash and was very satisfactory.”
Mirrlees, who has died aged 82, arrived at his conclusions about taxation in the middle of Harold Wilson’s government, when tax rates were as high as 80% and the Kinks wrote their famous anti-tax song Sunny Afternoon.
Looking for a formula to ensure that taxation brings in enough revenue to pay for a healthy range of public services but does not adversely affect certain parts of society, Mirrlees argued that rates of tax that are too high can demoralise taxpayers and encourage them to reduce their productivity.
Although this idea was particularly seized upon by those who wanted to see significantly lower taxes across the board, Mirrlees also argued that tax rates for some groups, “particularly middle-income earners”, could be made higher without any deleterious effects.
In 1971 he and Peter Diamond published an analysis of income tax schedules which, according to Peter Kay, writing in the Financial Times, “provided an intellectual rationale for the flattening of tax schedules that has occurred throughout the developed world”. Since then his formula has been widely used to guide governments in their decision-making about tax levels, and has ushered in a general flattening out and lowering of tax rates, for example to a maximum of 45% in the UK.
In many ways Mirrlees was constantly attempting to reconcile the internal dialogue between what he described as his leftwing heart and his rightwing mind. He often appreciated the problems that high tax rates might bring to the economy, but also treasured a strong and well-funded welfare state.
His influential work on taxation culminated in a report for the Institute for Fiscal Studies that bears his name – the Mirrlees Review of 2010. The review accepted the failures of current tax systems, arguing that “the UK system imposes unnecessary costs on the economy … reduces employment … discourages savings and investments, and distorts the form that they take”.
The Mirrlees Review advocated a fundamental change both to the way in which taxes were levied and on whom those taxes fall. While there was much to appreciate from his review, it was his argument for effective road pricing (through replacing the petrol and diesel levies with comprehensive congestion charging) and the ending of most VAT exemptions that improved tax efficiency and reduced the tax system’s complexity.
Mirrlees’s work was not confined to thoughts on taxation. As an economic theorist he won the Nobel Prize for economics in 1996 (alongside William Vickrey) for his work on “information asymmetry” – the idea than an imbalance exists when one party to a transaction, sometimes the buyer but more often the seller, has more information about the product or service being exchanged.
This is evident, for instance, when someone buys a new set of car tyres, for they know less than the mechanic about whether their old tyres really need to be replaced or not. Such information asymmetries can lead to a “market failure” whereby transactions take place when they should not (because the tyre seller has not been honest), or do not take place when they should (because the customer is made nervous about the asymmetry, and therefore does not trust the seller). Many features of modern economies, such as product guarantees, brands and rating agencies, are responses to this problem.
Born in Minnigaff, Dumfries and Galloway, James was the son of George, a bank manager, and his wife, Nan (nee Brown). After attending Douglas-Ewart high school in Newton Stewart he took an MA in mathematics and natural philosophy at Edinburgh University (1954-57), before studying mathematics and then a doing a PhD in economics at Trinity College, Cambridge.
In 1962-63 he was an adviser to the MIT Centre for International Studies in New Delhi, India, then for five years was an assistant lecturer, then lecturer, in economics at Cambridge. He became professor of economics at Oxford in 1968, holding that position until 1995, when he moved to Cambridge as professor of political economy. He was knighted in 1997.
If the best way to measure an educator is by the success of their proteges, then Mirrlees had an impact not seen since that of the great Austrian-British pioneer Friedrich von Hayek. At Oxford and Cambridge he worked with many who would become significant influences on the political and economic trajectory both of Britain and the rest of the western world. Among them were Joe Stiglitz, Nicholas Stern and John Vickers, who have each had an outsized impact on economic and political life since the financial crash of 2008.
Active in economics and education well into his 70s, including as a professor and later master of Morningside College in Hong Kong, Mirrlees was also a member of the Scottish government’s council of economic advisers. A self-effacing and modest man who was more than willing to accept his weaknesses, he once said: “It is simple to be wrong as well as to be right, and it is none too easy to distinguish between the two.” Many across the economic and political divides would do well to dwell on his words.
He is survived by his second wife, Patricia (nee Wilson), whom he married in 2001, and by two daughters from his first marriage in 1961 to Gillian (nee Hughes), who died in 1993.
• James Alexander Mirrlees, economist, born 5 July 1936; died 29 August 2018