Optimal taxation and public provision for poverty reduction

Abstract

The existing literature on optimal taxation typically assumes there exists a capacity to implement complex tax schemes, which is not necessarily the case for many developing countries. We examine the determinants of optimal redistributive policies in the context of a developing country that can only implement linear tax policies due to administrative reasons. Further, the reduction of poverty is typically the expressed goal of such countries, and this feature is also taken into account in our model. We derive the optimality conditions for linear income taxation, commodity taxation, and public provision of private and public goods for the poverty minimization case and compare the results to those derived under a general welfarist objective function. We also study the implications of informality on optimal redistributive policies for such countries. The exercise reveals non-trivial differences in optimal tax rules under the different assumptions. B Tuuli Paukkeri

Well-Being, Poverty, and Labor Income Taxation: Theory and Application to Europe and the United States

“…That a decrease in income poverty can be accompanied with a decrease in the well-being of the poor has been noted, for instance, by Kanbur, Keen, and Tuomala (1994a, b); Wane (2001); and, in the case of optimal linear income taxation, Kanbur and Keen (1989) as well as Kanbur et al (2018). A similar difficulty also arises when poverty is defined in terms of commodity deprivation instead of lack of income (see Pirttilä and Tuomala 2004).…”

Optimality of Tax Policy on the Basis of Comparative Analysis of Income Taxation

“…Dixit and Sandmo (1977) using the tools of optimal tax theory expressed the optimal linear income tax rate in terms of elasticity. The researchers (Kanbur, Paukkeri, Pirttilä, & Tuomala, 2018) show that the linear income tax includes additional components that work toward lowering the marginal tax rate. Public good provision in the optimal tax framework under poverty minimization was shown to depend on the relative efficiency of public provision versus income transfers in generating poverty reductions.…”

Promoting Education Under Distortionary Taxation: Equality of Opportunity Versus Welfarism

“…Equations ( 51) and ( 52) can be used to derive the optimal linear income tax in Equation (1) (see Kanbur et al 2018).…”

“…In order to prove Equation ( 50), note first that the term in the right-hand side is obtained in a fashion similar to the commodity taxation case in the appendix of (Kanbur et al 2018) by using ∑ i ρ i F N = 1 (implied by Equation 88).…”