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Optimal non-linear income taxation for the alleviation of income poverty

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  • Kanbur, Ravi
  • Keen, Michael
  • Toumala, Matti

Abstract

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.

Suggested Citation

  • Kanbur, Ravi & Keen, Michael & Toumala, Matti, 1991. "Optimal non-linear income taxation for the alleviation of income poverty," Policy Research Working Paper Series 616, The World Bank.
  • Handle: RePEc:wbk:wbrwps:616
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    References listed on IDEAS

    as
    1. Atkinson, A B, 1987. "On the Measurement of Poverty," Econometrica, Econometric Society, vol. 55(4), pages 749-764, July.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Services&Transfers to Poor; Achieving Shared Growth; Rural Poverty Reduction; Environmental Economics&Policies; Safety Nets and Transfers;
    All these keywords.

    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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