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Commodity Taxation under Habit Formation and Myopia

Listed author(s):
  • 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)

This paper analyzes the pattern of consumption taxes in a two period model with habit formation and myopia. An individuals 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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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. Helmuth Cremer & Philippe De Donder & Dario Maldonado & Pierre Pestieau, 2009. "Forced Saving, Redistribution, and Nonlinear Social Security Schemes," Southern Economic Journal, Southern Economic Association, vol. 76(1), pages 86-98, July.
  2. B. Douglas Bernheim & Antonio Rangel, 2009. "Beyond Revealed Preference: Choice-Theoretic Foundations for Behavioral Welfare Economics," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 51-104.
  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. Jonathan Gruber & Botond Köszegi, 2001. "Is Addiction "Rational"? Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1261-1303.
  5. Jean-Marie Lozachmeur, 2006. "Optimal Age-Specific Income Taxation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(4), pages 697-711, October.
  6. O'Donoghue, Ted & Rabin, Matthew, 2006. "Optimal sin taxes," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1825-1849, November.
  7. Nicole Maestas, 2007. "Back to Work: Expectations and Realizations of Work after Retirement," Working Papers 196.2, RAND Corporation.
  8. repec:adr:anecst:y:1988:i:9:p:03 is not listed on IDEAS
  9. John Muellbauer, 1988. "Habits, Rationality and Myopia in the Life Cycle Consumption Function," Annals of Economics and Statistics, GENES, issue 9, pages 47-70.
  10. Diamond, Peter & Koszegi, Botond, 2003. "Quasi-hyperbolic discounting and retirement," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 1839-1872, September.
  11. repec:adr:anecst:y:1988:i:9 is not listed on IDEAS
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