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Optimal non-linear income taxation for the alleviation of income poverty

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Author Info
Kanbur, Ravi
Keen, Michael
Toumala, Matti

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Abstract

There has been much discussion recently of structuring tax and transfer programs to ensure that resources go to the poor, with minimal leaks to the nonpoor. The poor have no incentive to earn income with 100 percent marginal tax rates, but how high or low the marginal rate of taxation should be, and how they should vary with income, is a complex issue - and opinions vary. Social security schemes that withdraw benefits represent an extremely high effective marginal tax rate; other schemes call for relatively low marginal tax rates at the bottom of the income distribution. Which tax-transfer schedule does most to reduce poverty? The issue is one of optimal nonlinear income taxation. The authors show that one of the key theoretical results of the welfarist literature is overturned: if it is desirable for everybody to work, the optimal marginal tax rate on the very poorest individuals is strictly negative. They argue that the nonwelfarist perspective points toward lower marginal tax rates in the lower part of the income distribution than does the welfarist perspective. But numerical simulations suggest that the effect is of limited quantitative significance. Using conventional functional forms and parameter values, optimal marginal tax rates on the poor are in the 60-70 percent range.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 616.

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Date of creation: 31 Mar 1991
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Handle: RePEc:wbk:wbrwps:616

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Keywords: Services&Transfers to Poor; Achieving Shared Growth; Rural Poverty Reduction; Environmental Economics&Policies; Safety Nets and Transfers;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kanbur, R. & Keen, M., 1988. "Poverty, Incentives And Linear Income Taxation," The Warwick Economics Research Paper Series (TWERPS) 298, University of Warwick, Department of Economics.
  2. Besley, Timothy J & Kanbur, S M Ravi, 1988. "Food Subsidies and Poverty Alleviation," Economic Journal, Royal Economic Society, vol. 98(392), pages 701-19, September. [Downloadable!] (restricted)
  3. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Blackwell Publishing, vol. 38(114), pages 175-208, April. [Downloadable!] (restricted)
  4. King, Mervyn A., 1983. "Welfare analysis of tax reforms using household data," Journal of Public Economics, Elsevier, vol. 21(2), pages 183-214, July. [Downloadable!] (restricted)
  5. Besley, Timothy, 1990. "Means Testing versus Universal Provision in Poverty Alleviation Programmes," Economica, London School of Economics and Political Science, vol. 57(225), pages 119-29, February. [Downloadable!] (restricted)
  6. Atkinson, A B, 1987. "On the Measurement of Poverty," Econometrica, Econometric Society, vol. 55(4), pages 749-64, July. [Downloadable!] (restricted)
  7. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. MALDONADO, Darío, 2006. "Social security, income taxation and poverty alleviation," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO - FACULTAD DE ECONOMÍA. [Downloadable!]
  2. Beaudry, Paul & Blackorby, Charles, 2006. "Taxes and Employment Subsidies in Optimal Redistribution Programs," The Warwick Economics Research Paper Series (TWERPS) 766, University of Warwick, Department of Economics. [Downloadable!]
    Other versions:
  3. Wane, Waly, 2000. "The optimal income tax when poverty is a public"bad"," Policy Research Working Paper Series 2270, The World Bank. [Downloadable!]
    Other versions:
  4. Olivier Bargain & Olivier Donni, 2007. "A Theory of Child Targeting," Working Papers 200703, School Of Economics, University College Dublin. [Downloadable!]
    Other versions:
  5. Pierre Picard, 2001. "Optimal Employment Subsidies to Heterogeneous Workers: Unemployment-Trap, Job-Additionality and Tax Rates," Annales d'Economie et de Statistique, ADRES, issue 62, pages 06, Avril-Jui. [Downloadable!]
  6. Miguel Székely, 1997. "Policy Options for Poverty Alleviation," RES Working Papers 4062, Inter-American Development Bank, Research Department. [Downloadable!]
  7. Johannes Rincke & Robert Schwager, 2005. "Skills, Social Mobility, and the Support for the Welfare State," cege – Center for European, Governance and Economic Development Research Discussion Papers 48, cege – Center for European, Governance and Economic Development Research, University of Goettingen (Germany).. [Downloadable!]
  8. Boone, Jan & Bovenberg, A Lans, 2002. "The Optimal Taxation of Unskilled Labour with Job Search and Social Assistance," CEPR Discussion Papers 3446, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  9. Michael Keen, 1997. "Peculiar institutions: A British perspective on tax policy in the United States," Fiscal Studies, Institute for Fiscal Studies, vol. 18(4), pages 371-400, November. [Downloadable!]
  10. Sören Blomquist & Luca Micheletto, 2005. "Optimal Redistributive Taxation when Government’s and Agents’ Preferences Differ," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  11. Boone, J. & Bovenberg, L., 2001. "Unemployment vs. in-work benefits with search unemployment and observable abilities," Discussion Paper 77, Tilburg University, Center for Economic Research. [Downloadable!]
  12. Robin Boadway & Nicolas Marceau & Motohiro Sato, 1997. "An Agency Model of Welfare and Disability Assistance," Cahiers de recherche CREFE / CREFE Working Papers 46, CREFE, Université du Québec à Montréal. [Downloadable!]
    Other versions:
  13. Jesurun-Clements, Nancy, 1992. "Paternalism and the alleviation of poverty," Policy Research Working Paper Series 822, The World Bank. [Downloadable!]
  14. Ravi Kanbur & Jukka Pirttilä & Matti Tuomala, 2004. "Non-Welfarist Optimal Taxation and Behavioral Public Economics," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  15. Stuart Adam, 2005. "Measuring the marginal efficiency cost of redistribution in the UK," IFS Working Papers W05/14, Institute for Fiscal Studies. [Downloadable!]
  16. Miguel Székely, 1997. "Opciones de políticas para la paliación de la pobreza," RES Working Papers 4063, Inter-American Development Bank, Research Department. [Downloadable!]
  17. Beaudry, Paul & Blackorby, Charles & Szalay, Dezso, 2006. "Taxes and Employment Subsidies in Optimal Redistribution Programs (Revised Version)," The Warwick Economics Research Paper Series (TWERPS) 779, University of Warwick, Department of Economics. [Downloadable!]
  18. Emmanuel Saez, 2000. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," NBER Working Papers 7708, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  19. John Creedy & Nicolas Hérault, 2009. "Optimal Marginal Income Tax Reforms: A Microsimulation Analysis," Melbourne Institute Working Paper Series wp2009n23, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
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