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.
Highlights
High levels of within-country inequality in many otherwise successful developing countries have become a key policy concern in global development debate
The result is analogous to the pure public good result in (9), with the difference that the impact G has on poverty depends on whether public provision fully crowds out private purchases of the good
This paper examined optimal linear income taxation, public provision of public and private goods and the optimal combination of linear income tax and commodity taxes when the government’s aim is to minimize poverty
Summary
High levels of within-country inequality in many otherwise successful developing countries have become a key policy concern in global development debate. In conventional optimal taxation models, the government’s objective function is modeled as a social welfare function, which depends directly on individual utilities We depart from this welfarist approach by presenting general non-welfarist tax rules, as in Kanbur et al (2006), and, in particular, optimal tax and public good provision rules when the government is assumed to minimize poverty. We first present welfarist tax rules (which are mostly already available in the literature) to provide a benchmark to examine how applying poverty minimization as an objective changes the optimal tax and public service provision rules.
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