The optimal income tax when poverty is a public 'bad'

Poverty is considered as an aggregate negative externality that may affect people differently depending on their aversion to poverty. If society is on average averse to poverty, then the optimal income tax schedule displays n egative marginal tax rates at least for the less skilled individuals. Negat ive marginal tax rates play the role of a Pigouvian earnings subsidy and fo ster the supply of labor of poor individuals. The no-distortion at the endp oints result which is therefore violated can be restored once the focus is shifted from individual to social distortions. (C) 2001 Elsevier Science B. V. All rights reserved.