The optimal income tax when poverty is a public"bad"
AbstractThe 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 InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 2270.
Date of creation: 31 Jan 2000
Date of revision:
Environmental Economics&Policies; Economic Theory&Research; Health Economics&Finance; Achieving Shared Growth; Safety Nets and Transfers;
Other versions of this item:
- Wane, Waly, 2001. "The optimal income tax when poverty is a public 'bad'," Journal of Public Economics, Elsevier, vol. 82(2), pages 271-299, November.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
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