Diamond-Mirrlees meets Sims: Optimal Taxation with Rational Inattention -- by George-Marios Angeletos, Matias Bayas-Erazo

TEXT START: We study optimal commodity taxation when consumers are rationally inattentive and the planner internalizes their attention costs.

The Dissection

The paper converts limited attention into a tractable tax-design variable, then shows that—under its benchmark—the classical formulas survive. Its real function is containment: a potentially disruptive behavioral feature is absorbed into the existing public-finance machine. The paper refines tax engineering; it does not examine whether the economic system being engineered can survive AI-driven displacement.

The Core Fallacy

Relative to the Discontinuity Thesis, the central error is confusing model-level invariance with system-level durability. Showing that optimal tax formulas remain valid does not show that taxation, fiscal sovereignty, mass employment, or productive participation remain viable.

The framework presumes a functioning planner, enforceable taxes, coherent consumer choice, stable markets, and a fiscal system capable of converting revenue into social coordination. Under P1–P3, those are precisely the institutions placed under pressure when AI severs the labor-to-wage-to-consumption circuit. Rational inattention may be correctly modeled while the larger economic order becomes irrelevant beneath it.

Hidden Assumptions

• The planner remains powerful enough to internalize attention costs.
• Commodity markets and tax bases remain economically central.
• Consumers remain meaningful participants rather than recipients of transfers in an economy dominated by AI capital.
• Tax compliance and state administrative capacity survive concentration of productive power.
• Welfare optimization remains politically actionable rather than decorative mathematics.
• Behavioral frictions are the relevant constraint, rather than ownership of automated productive systems.
• State-dependent and salience-sensitive taxes can be implemented at scale without triggering evasion, capture, or institutional breakdown.

Social Function

Primary classification: partial truth serving transition management and ideological anesthetic.

The result may be valid within its stated benchmark. Its broader social function is more accommodating: it keeps elite policy analysis focused on marginal tax design while the ownership structure of production undergoes a more consequential transformation. It offers precision at the level of the dashboard while leaving the engine-room seizure unexamined. That is prestige economics performing continuity.

The Verdict

Technically narrow, structurally nonresponsive, and potentially useful only as hospice policy. The paper may establish that rational inattention does not require changing classical commodity-tax formulas. It does not establish that the post-WWII economic order survives. Under the Discontinuity Thesis, this is a refinement of fiscal machinery after the productive-participation foundation has begun to rot.