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Commodity Taxation under Habit Formation and Myopia

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Author Info

  • Cremer Helmuth

    () (Toulouse School of Economics)

  • De Donder Philippe

    () (Toulouse School of Economics)

  • Maldonado Dario

    () (Universidad del Rosario and CeiBA - Complejidad)

  • Pestieau Pierre

    () (University of Liège and Université Catholique de Louvain)

Abstract

This paper analyzes the pattern of consumption taxes in a two period model with habit formation and myopia. An individual’s second-period needs increase with first period consumption. However, myopic individuals do not see this habit formation relation when they take their saving decision. The first-best solution is decentralized by a simple “Pigouvian” (paternalistic) consumption tax (along with suitable lump-sum taxes). In a second-best setting, when personalized lump-sum transfers are not available, consumption taxes may have conflicting paternalistic and redistributive effects. Taxes should discourage consumption of goods that entail negative externalities (unforeseen habits), but instead they discourage less the consumption of goods that are proportionately consumed by individuals with high net social marginal utility of income. Both myopic and farsighted individuals may benefit more from the second-best policy as the proportion of myopic agents in society increases.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 10 (2010)
Issue (Month): 1 (September)
Pages: 1-27

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Handle: RePEc:bpj:bejeap:v:10:y:2010:i:1:n:89

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  1. Douglas Bernheim & Antonio Rangel, 2007. "Beyond Revealed Preference Choice Theoretic Foundations for Behavioral Welfare Economics," Discussion Papers 07-031, Stanford Institute for Economic Policy Research.
  2. Cremer, Helmuth & De Donder, Philippe & Maldonado, Darío & Pestieau, Pierre, 2008. "Forced Saving, Redistribution and Nonlinear Social Security Schemes," CEPR Discussion Papers 6775, C.E.P.R. Discussion Papers.
  3. Gruber, Jonathan & Koszegi, Botond, 2004. "Tax incidence when individuals are time-inconsistent: the case of cigarette excise taxes," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1959-1987, August.
  4. Woittiez, Isolde & Kapteyn, Arie, 1998. "Social interactions and habit formation in a model of female labour supply," Journal of Public Economics, Elsevier, vol. 70(2), pages 185-205, November.
  5. B. Douglas Bernheim & Antonio Rangel, 2009. "Beyond Revealed Preference: Choice-Theoretic Foundations for Behavioral Welfare Economics-super-," The Quarterly Journal of Economics, MIT Press, vol. 124(1), pages 51-104, February.
  6. O'Donoghue, Ted & Rabin, Matthew, 2006. "Optimal sin taxes," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1825-1849, November.
  7. Muellbauer, John, 1986. "Habits, Rationality and Myopia in the Life-Cycle Consumption Function," CEPR Discussion Papers 112, C.E.P.R. Discussion Papers.
  8. Jonathan Gruber & Botond Köszegi, 2001. "Is Addiction "Rational"? Theory And Evidence," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1261-1303, November.
  9. Diamond, Peter & Koszegi, Botond, 2003. "Quasi-hyperbolic discounting and retirement," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 1839-1872, September.
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Cited by:
  1. Markus Haavio & Kaisa Kotakorpi, 2012. "Sin Licenses Revisited," CESifo Working Paper Series 4010, CESifo Group Munich.

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