Poverty and the Optimal General Income Tax-cum-Audit Policy

This paper investigates the optimal general income tax and audit policies when poverty is a public bad and income is not observed in an economy with two types of individuals. Dierently from the traditional "non-distortion at the top" result of the optimal taxation literature, we nd that the optimal marginal income tax rate on skilled individuals is positive when reducing poverty is one of the goals of the social planner and their consumption can affect negatively the poverty measure. Consequently, skilled individuals might be audited stochastically. We characterize a tax regime in which unskilled workers face a negative marginal tax.Poverty, Tax evasion, Optimum Taxation