Optimal taxation refers to the design of tax systems that aim to maximize social welfare while minimizing economic distortions. It seeks to balance the need for government revenue with the goal of promoting efficiency and equity in the economy. By carefully considering tax rates and structures, policymakers can create a system that encourages productivity and investment. The concept often involves analyzing the trade-offs between different types of taxes, such as income taxes and consumption taxes. Economists like Arthur Pigou and James Mirrlees have contributed to the understanding of how taxes can be structured to achieve these goals, ensuring that the burden is fairly distributed among individuals and businesses.