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Taxing Sin Goods and Subsidizing Health Care

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  • Cremer, Helmuth
  • De Donder, Philippe
  • Maldonado, Darío
  • Pestieau, Pierre

Abstract

We consider a two-period model. In the first period, individuals consume two goods: one is sinful and the other is not. The sin good brings pleasure but has a detrimental effect on second period health and individuals tend to underestimate this effect. In the second period, individuals can devote part of their saving to improve their health status and thus compensate for the damage caused by their sinful consumption. We consider two alternative specifications concerning this second period health care decision: either individuals acknowledge that they have made a mistake in the first period out of myopia or ignorance, or they persist in ignoring the detrimental effect of their sinful consumption. We study the optimal linear taxes on sin good consumption, saving and health care expenditures for a paternalistic social planner. We compare those taxes in the two specifications. We show under which circumstances the first best outcome can be decentralized and we study the second best taxes when saving is unobservable.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6777.

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Date of creation: Apr 2008
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Handle: RePEc:cpr:ceprdp:6777

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Keywords: behavioral economics; dual vs single self; paternalism;

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References

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  1. Ted O'Donoghue & Matthew Rabin, 2005. "Optimal Sin Taxes," Levine's Bibliography 784828000000000346, UCLA Department of Economics.
  2. Ted O'Donoghue & Matthew Rabin, 2003. "Studying Optimal Paternalism, Illustrated by a Model of Sin Taxes," American Economic Review, American Economic Association, vol. 93(2), pages 186-191, May.
  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. Besley, Timothy, 1988. "A simple model for merit good arguments," Journal of Public Economics, Elsevier, vol. 35(3), pages 371-383, April.
  5. 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.
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Cited by:
  1. Marie-Louise Leroux, 2011. "Endogenous differential mortality, non-contractible effort and non-linear taxation," International Tax and Public Finance, Springer, vol. 18(1), pages 56-73, February.
  2. Pierre Pestieau & Grégory Ponthiere, 2012. "On the Policy Implications of Changing Longevity," CESifo Working Paper Series 3926, CESifo Group Munich.
  3. PESTIEAU, Pierre & PONTHIERE, Grégory, . "The public economics of increasing longevity," CORE Discussion Papers RP -2464, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. PESTIEAU, Pierre & PONTHIERE, Grégory, . "Myopia, regrets, and risky behaviors," CORE Discussion Papers RP -2452, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Bonnet, Céline & Réquillart, Vincent, 2013. "Tax incidence with strategic firms in the soft drink market," Journal of Public Economics, Elsevier, vol. 106(C), pages 77-88.
  6. Catarina Goulao & Agustin Pérez-Barahona, 2012. "Intergenerational transmission of non-communicable chronic diseases," Working Papers hal-00690325, HAL.
  7. repec:hal:wpaper:halshs-00676492 is not listed on IDEAS
  8. Marie-Louise Leroux & Pierre Pestieau & Gregory Ponthiere, 2011. "Optimal linear taxation under endogenous longevity," Journal of Population Economics, Springer, vol. 24(1), pages 213-237, January.
  9. Danilowicz, Kamila & Schwager, Robert, 2013. "Subsidizing Health-Conscious Behavior Now or Later," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80008, Verein für Socialpolitik / German Economic Association.
  10. Bossi, Luca & Calcott, Paul & Petkov, Vladimir, 2013. "Optimal tax rules and addictive consumption," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 984-1000.

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