Essays on Taxation, Externalities, and Poverty Traps

Abstract: This thesis consists of three self-contained essays.Essay I characterizes the optimal mix of linear commodity taxation and non-linear income taxation in a dynamic economy where consumption gives rise to positional and environmental externalities. Both externalities are modeled as stock-externalities by reflecting people's present and past consumption. With non-atmospheric positional externalities, the principle of targeting does not apply, which means that the policy rules for all tax instruments are adjusted in response to the positional externality. The results of the model imply simultaneous motives for corrective taxation, which interacts in an important way.Essay II presents a poverty trap model at the firm level, which is driven by time capacity constraints, and involves the optimal allocation of time between a basic and a more-productive business. To operate the more-productive business requires additional time input but enhances the ability to process information in the future, which in turn, determines the firm's time capacity. As a result, a firm with a low ability may encounter challenges in expanding time capacity for further growth. We highlight the importance of passing proficiency thresholds in operating the more-productive business to achieve sustainable growth. The model can explain why aid that increases the ability to process information generates heterogeneous effects on firms, in terms of both short-run and long-run growth. Essay III analyzes the optimal aid distribution in the presence of poverty traps and funds deficiency. The aid programs include a top-down and a bottom-up policy. The former aims to lift poverty permanently by prioritizing those who are better off in terms of economic prospects; the latter is for a momentary improvement with the opposite prioritization. The trade-off between the long-run and short-run effects shapes the optimal aid distribution, where the current value of lifting poverty from productivity improvement and available funds jointly matter. I characterize the conditions when funding the top-down policy exclusively or two policies simultaneously is optimal. In the latter situation, certain aid receivers have to be left in poverty traps.