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