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Optimal Taxation and Public Provision for Poverty Reduction

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  • Kanbur, Ravi
  • Pirttilä, Jukka
  • Tuomala, Matti
  • Ylinen, Tuuli

Abstract

The existing literature on optimal taxation typically assumes there exists a capacity to implement complex tax schemes, which is not necessarily the case for many developing countries. We examine the determinants of optimal redistributive policies in the context of a developing country that can only implement linear tax policies due to administrative reasons. Further, the reduction of poverty is typically the expressed goal of such countries, and this feature is also taken into account in our model. We derive the optimality conditions for linear income taxation,commodity taxation, and public provision of private and public goods for the poverty minimization case, and compare the results to those derived under a general welfarist objective function. We also study the implications of informality on optimal redistributive policies for such countries, and comment on the potential for minimum wage regulation. The exercise reveals non-trivial differences in optimal tax rules under the different assumptions. The derived formulae also capture the sufficient statistics that the governments need to pay attention to when designing poverty alleviation policies.

Suggested Citation

  • Kanbur, Ravi & Pirttilä, Jukka & Tuomala, Matti & Ylinen, Tuuli, 2015. "Optimal Taxation and Public Provision for Poverty Reduction," CEPR Discussion Papers 10754, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10754
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    Cited by:

    1. Maniquet, François & Neumann, Dirk, 2016. "Well-Being, Poverty and Labor Income Taxation: Theory and Application to Europe and the U.S," IZA Discussion Papers 10181, Institute of Labor Economics (IZA).
    2. Obara Takuya & Tsugawa Shuichi, 2019. "Public Good Provision Financed by Nonlinear Income Tax Under Reduction of Envy," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 19(4), pages 1-16, October.
    3. Obara, Takuya & Tsugawa, Shuichi & Managi, Shunsuke, 2019. "Envy-free Pricing for Impure Public Good," CCES Discussion Paper Series 69, Center for Research on Contemporary Economic Systems, Graduate School of Economics, Hitotsubashi University.
    4. Obara Takuya & Tsugawa Shuichi, 2019. "Public Good Provision Financed by Nonlinear Income Tax Under Reduction of Envy," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 19(4), pages 1-16, October.
    5. Abuselidze, George, 2020. "Optimality of tax policy on the basis of comparative analysis of income taxation," MPRA Paper 104591, University Library of Munich, Germany.

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    More about this item

    Keywords

    commodity taxation; income taxation; poverty; public good provision; redistribution;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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