Corporate Social Responsibility and Regulation: Taxing Ethical behaviour

This paper analyzes the impact of Corporate Social Responsibility in a monopoly setup and the implications of government intervention through a consumption tax or subsidy. Assuming that consumers have heterogeneous preferences regarding the CSR content of the private good they purchase and that their degree of altruism is positively related to their income, the paper assesses whether taxing CSR products could be welfare improving, when the tax revenues are recycled in the form of government provision of a public good that either substitutes for or complements the firm's CSR investments. When private and public investments are perfect substitutes, CSR activities should benefit from tax exemptions. However, when they are complements, the CSR products should be taxed when there is a sufficiently large marginal willingness to pay for such activities. Taxing the CSR product can then be viewed as a form of progressive taxation whereby more taxes are levied on wealthier consumers to make the public good available to everyone. Finally, given different objectives of the regulator, the question of whether taxes on CSR goods disfavor the efficient producers or rather the inefficient ones is discussed.