Working Paper: CEPR ID: DP10754
Authors: Ravi Kanbur; Jukka Pirttil; Matti Tuomala; Tuuli Ylinen
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, and comment on the potential for minimum wage regulation. The exercise reveals non-trivial differences in optimal tax rules under the different assumptions. The derived formulae also capture the sufficient statistics that the governments need to pay attention to when designing poverty alleviation policies.
Keywords: Commodity Taxation; Income Taxation; Poverty; Public Good Provision; Redistribution
JEL Codes: H21; H40; O12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| linear income taxation (H29) | poverty reduction (I32) |
| progressive tax system (H29) | poverty reduction (I32) |
| tax policy (linear vs. progressive) (H29) | income distribution (D31) |
| lower marginal tax rates (H29) | work encouragement among the poor (J68) |
| presence of informal sector (E26) | tax evasion (H26) |
| tax evasion (H26) | disposable income (D10) |
| disposable income (D10) | poverty levels (I32) |
| public good provision (H42) | poverty reduction (I32) |
| efficiency of public services (H40) | poverty reduction (I32) |
| optimal commodity taxation (H21) | consumption patterns of the poor (P46) |