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Optimal Non-Linear Income Taxation for the Alleviation of Income Poverty

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  • Ravi Kanbur
  • Michael Keen
  • Matti Tuomala

Abstract

This paper is concerned with the optimal use of income information in the design of tax/transfer systems to alleviate poverty. The issue is one of optimal non-linear income taxation, but using a non-welfarist objective function that seems to accord well with the common concerns of policy debate: an income-based poverty index. We show that one of the key 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. More generally, it is argued that the non-welfarist perspective points towards lower marginal tax rates in the lower part of the distribution than does the welfarist. Numerical simulations suggest, however, that this 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% range.

Suggested Citation

  • Ravi Kanbur & Michael Keen & Matti Tuomala, 1990. "Optimal Non-Linear Income Taxation for the Alleviation of Income Poverty," Working Paper 799, Economics Department, Queen's University.
  • Handle: RePEc:qed:wpaper:799
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    References listed on IDEAS

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    1. Atkinson, A B, 1987. "On the Measurement of Poverty," Econometrica, Econometric Society, vol. 55(4), pages 749-764, July.
    2. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-766, May.
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    4. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059.
    5. Jesus Seade, 1982. "On the Sign of the Optimum Marginal Income Tax," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 637-643.
    6. Besley, Timothy J & Kanbur, S M Ravi, 1988. "Food Subsidies and Poverty Alleviation," Economic Journal, Royal Economic Society, vol. 98(392), pages 701-719, September.
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    8. Kanbur, Ravi & Keen, Michael, 1988. "Poverty, Incentives And Linear Income Taxation," Economic Research Papers 272843, University of Warwick - Department of Economics.
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    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L68 - Industrial Organization - - Industry Studies: Manufacturing - - - Appliances; Furniture; Other Consumer Durables

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