OPTIMAL NONLINEAR INCOME TAXATION FOR THE ALLEVIATION OF INCOME-POVERTY

This paper examines the optimal use of income information in designing tax/transfer systems to alleviate poverty, exploring the implications of a non-welfarist objective function that captures the tone of much policy debate: an income-based poverty index. A key welfarist result is overturned: if it is desirable for everybody to work, the optimal marginal rate on the very poorest is strictly negative. Numerical simulations suggest, however, that this end-point result is of limited quantitative significance: poverty-minimising marginal tax rates on the poor are not substantially lower than intuition trained in the welfarist tradition would lead one to expect.