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The optimal income tax when poverty is a public "bad", Volume 1
 
Author:Wane, Waly; Date Stored:2000/02/09
Document Date:2000/01/31Document Type:Policy Research Working Paper
SubTopics:Environmental Economics & Policies; Achieving Shared Growth; Economic Theory & Research; Health Economics & Finance; Safety Nets and TransfersLanguage:English
Major Sector:Public Administration, Law, and JusticeReport Number:WPS2270
Sub Sectors:Other Public Sector ManagementCollection Title:Policy, Research working paper ; no. WPS 2270
Volume No:1  

Summary: The author considers poverty as an aggregate negative externality that affects people in different ways, depending on their aversion to poverty. If society is on average averse to poverty, then the optimal income tax schedule displays negative marginal tax rates, at least for less skilled individuals. Negative marginal tax rates play the role of a Pigouvian earnings subsidy, fostering the supply of poor individuals to provide labor. The result of no distortion at the endpoints, which is therefore violated, can be restored once the focus is shifted from individual to social distortions.

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