Optimal non-linear income taxation for the alleviation of income poverty
There has been much discussion recently of structuring tax and transfer programs to ensure that resources go to the poor, with minimal leaks to the nonpoor. The poor have no incentive to earn income with 100 percent marginal tax rates, but how high or low the marginal rate of taxation should be, and how they should vary with income, is a complex issue - and opinions vary. Social security schemes that withdraw benefits represent an extremely high effective marginal tax rate; other schemes call for relatively low marginal tax rates at the bottom of the income distribution. Which tax-transfer schedule does most to reduce poverty? The issue is one of optimal nonlinear income taxation. The authors show that one of the key theoretical 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. They argue that the nonwelfarist perspective points toward lower marginal tax rates in the lower part of the income distribution than does the welfarist perspective. But numerical simulations suggest that the 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 percent range.
|Date of creation:||31 Mar 1991|
|Contact details of provider:|| Postal: 1818 H Street, N.W., Washington, DC 20433|
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Atkinson, A B, 1987. "On the Measurement of Poverty," Econometrica, Econometric Society, vol. 55(4), pages 749-764, July.
- Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-766, May.
- Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059.
- Kanbur, R. & Keen, M., 1988. "Poverty, Incentives And Linear Income Taxation," The Warwick Economics Research Paper Series (TWERPS) 298, University of Warwick, Department of Economics.
- King, Mervyn A., 1983. "Welfare analysis of tax reforms using household data," Journal of Public Economics, Elsevier, vol. 21(2), pages 183-214, July.
- 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.
- J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
- Besley, Timothy, 1990. "Means Testing versus Universal Provision in Poverty Alleviation Programmes," Economica, London School of Economics and Political Science, vol. 57(225), pages 119-129, February.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:616. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.