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

Ravi Kanbur, Michael Keen and Matti Toumala

No 616, Policy Research Working Paper Series from The World Bank

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.

Keywords: Services&Transfers to Poor; Achieving Shared Growth; Rural Poverty Reduction; Environmental Economics&Policies; Safety Nets and Transfers (search for similar items in EconPapers)
Date: 1991-03-31
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://www-wds.worldbank.org/external/default/WDSC ... d/PDF/multi0page.pdf (application/pdf)

Related works:
Journal Article: Optimal non-linear income taxation for the alleviation of income-poverty (1994)
Working Paper: OPTIMAL NON-LINEAR INCOME TAXATION FOR THE ALLEVIATION OF INCOME POVERTY (1990)
Working Paper: Optimal Non-Linear Income Taxation for the Alleviation of Income Poverty (1990)
Working Paper: Optimal Non-Linear Income Taxation for the Alleviation of Income Poverty (1990)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:616

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi (ryazigi@worldbank.org).