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The optimal income tax when poverty is a public 'bad'

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  • Wane, Waly

Abstract

The author considers poverty as an aggregate negative externality that affects people in different ways, depending on their aversion to poverty. If society is on average averse to poverty, then the optimal income tax schedule displays negative marginal tax rates, at least for less skilled individuals. Negative marginal tax rates play the role of a Pigouvian earnings subsidy, fostering the supply of poor individuals to provide labor. The result of no distortion at the endpoints, which is therefore violated, can be restored once the focus is shifted from individual to social distortions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 82 (2001)
Issue (Month): 2 (November)
Pages: 271-299

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Handle: RePEc:eee:pubeco:v:82:y:2001:i:2:p:271-299

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Web page: http://www.elsevier.com/locate/inca/505578

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  1. Eissa, Nada & Liebman, Jeffrey B, 1996. "Labor Supply Response to the Earned Income Tax Credit," The Quarterly Journal of Economics, MIT Press, vol. 111(2), pages 605-37, May.
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  3. Bourguignon, Francois & Fields, Gary, 1997. "Discontinuous losses from poverty, generalized P[alpha] measures, and optimal transfers to the poor," Journal of Public Economics, Elsevier, vol. 63(2), pages 155-175, January.
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  5. Seade, Jesus, 1982. "On the Sign of the Optimum Marginal Income Tax," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 637-43, October.
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  7. Brito, Dagobert L & Oakland, William H, 1977. "Some Properties of the Optimal Income-Tax," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 407-23, June.
  8. Ebert, Udo, 1992. "A reexamination of the optimal nonlinear income tax," Journal of Public Economics, Elsevier, vol. 49(1), pages 47-73, October.
  9. Seade, Jesus, 1979. "Optimal Nonlinear Policies for Non-Utilitarian Motives," The Warwick Economics Research Paper Series (TWERPS) 143, University of Warwick, Department of Economics.
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  12. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, vol. 7(2), pages 203-235, April.
  13. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May.
  14. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
  15. Diamond, P., 1994. "Optimal Income Taxation: An Exemple with a U-Shaped Pattern of Optimal Marginal Tax Rates," Working papers 94-14, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Cremer, Helmuth & Gahvari, Firouz & Ladoux, Norbert, 1998. "Externalities and optimal taxation," Journal of Public Economics, Elsevier, vol. 70(3), pages 343-364, December.
  17. Sadka, Efraim, 1976. "Social Welfare and Income Distribution," Econometrica, Econometric Society, vol. 44(6), pages 1239-51, November.
  18. Besley, Timothy & Coate, Stephen, 1992. "Workfare versus Welfare Incentive Arguments for Work Requirements in Poverty-Alleviation Programs," American Economic Review, American Economic Association, vol. 82(1), pages 249-61, March.
  19. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
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Cited by:
  1. Stefan Homburg, 2001. "The Optimal Income Tax: Restatement and Extensions," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 58(4), pages 363-395, November.
  2. Darío Maldonado, 2006. "Social security, income taxation and poverty alleviation," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO.
  3. Cassone, Alberto & Marchese, Carla, 2001. "Should the death tax die? And should it leave an inheritance?," POLIS Working Papers 22, Institute of Public Policy and Public Choice - POLIS.
  4. Johann K. Brunner, 2003. "Optimale direkte und indirekte Steuern bei unterschiedlicher Anfangsausstattung," Economics working papers 2003-10, Department of Economics, Johannes Kepler University Linz, Austria.

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