The discussion of this chapter will cover the present state of optimal income tax theory and its applicability to the real world. The chapter will take as a starting point the classic analysis of Mirrlees (1971) and show how the determination of the optimal rate structure as laid out by Mirrlees is affected by introducing participation elasticities. The closely related issue of migration across countries will be discussed. An empirical application for the British case will be given. The paper will discuss a number of extensions of the optimal tax/transfer problem to cast light on various current policy debates on tax and transfer policy. It will also address the question of how families should be taxed and whether taxes and transfers should be assessed at the individual or the household level.