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Poverty, taxation and governance

  • Sugata Marjit
  • Vivekananda Mukherjee
  • Martin Kolmar

In a simple model based on political support approach, we show that poor and less egalitarian societies may impose a lower tax rate contrary to the prediction of the median voter approach. This is consistent with the available empirical findings. In the framework developed in this paper, the government can strategically design a weak governance system to promote informal activities for the poor. This constitutes an alternative redistributive strategy other than the standard tax-transfer policy. The government chooses the tax rate and the degree of governance simultaneously to maximize the average income of the poor in the informal sector of the economy, i.e. those who constitute the majority and help in winning the election.

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Article provided by Taylor & Francis Journals in its journal The Journal of International Trade & Economic Development.

Volume (Year): 15 (2006)
Issue (Month): 3 ()
Pages: 325-333

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Handle: RePEc:taf:jitecd:v:15:y:2006:i:3:p:325-333
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  1. Persson, Torsten & Tabellini, Guido, 1999. "Political economics and macroeconomic policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 22, pages 1397-1482 Elsevier.
  2. Marcouiller, Douglas & Young, Leslie, 1995. "The Black Hole of Graft: The Predatory State and the Informal Economy," American Economic Review, American Economic Association, vol. 85(3), pages 630-46, June.
  3. Paul, Gilles Saint & Verdier, Thierry, 1996. "Inequality, redistribution and growth: A challenge to the conventional political economy approach," European Economic Review, Elsevier, vol. 40(3-5), pages 719-728, April.
  4. Marjit, Sugata, 2003. "Economic reform and informal wage--a general equilibrium analysis," Journal of Development Economics, Elsevier, vol. 72(1), pages 371-378, October.
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