Optimal taxes and tariffs with private information

The implications of private information regarding a worker's skills for optimal tax policy in an open economy are explored. Two cases are considered. In one general skills are private information and in the other sector-specific skills are private information. It is shown that for a small open economy tariffs and other equivalent trade distortions are not part of the optimal tax policy in either case. In both cases the optimal policy distorts the labor-leisure choice but only in the case of sector-specific skills as private information are labor allocation decisions distorted. For a large country, distortions that are equivalent to the standard optimal tariff formula characterize the optimal tax policy.