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Poverty and the Optimal General Income Tax-cum-Audit Policy

  • Marcelo Arbex
  • Enlinson Mattos

This paper investigates the optimal general income tax and audit policies when poverty is a public bad and income is not observed in an economy with two types of individuals. Di erently from the traditional "non-distortion at the top" result of the optimal taxation literature, we nd that the optimal marginal income tax rate on skilled individuals is positive when reducing poverty is one of the goals of the social planner and their consumption can affect negatively the poverty measure. Consequently, skilled individuals might be audited stochastically. We characterize a tax regime in which unskilled workers face a negative marginal tax.

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Paper provided by Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto in its series Working Papers with number 02-2010.

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Date of creation: 03 Mar 2010
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Handle: RePEc:fea:wpaper:02-2010
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