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Pareto-improving tax policies under hyperbolic discounting

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  • Minwook Kang

    () (Nanyang Technological University)

Abstract

This paper investigates the welfare implications of tax policies in the economy with present-biased consumers. We show that consumption taxes, income subsidies, or capital subsidies can improve not only hyperbolically discounted intertemporal utilities, but also exponentially discounted commitment utilities. This finding implies that both consumers and the government can have incentives to adopt tax policies against present-biased decisions. All the results are shown in a three-period model with general utility and production functions. A steady-state analysis indicates that the proposed tax policy is effective in recovering the welfare/capital loss due to consumers’ present bias.

Suggested Citation

  • Minwook Kang, 2019. "Pareto-improving tax policies under hyperbolic discounting," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(3), pages 618-660, June.
  • Handle: RePEc:kap:itaxpf:v:26:y:2019:i:3:d:10.1007_s10797-018-9527-y
    DOI: 10.1007/s10797-018-9527-y
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    2. Heifetz, Aviad & Minelli, Enrico & Polemarchakis, Herakles, 2020. "Liberal parentalism," The Warwick Economics Research Paper Series (TWERPS) 1289, University of Warwick, Department of Economics.
    3. Kang, Minwook, 2020. "Demand deposit contracts and bank runs with present biased preferences," Journal of Banking & Finance, Elsevier, vol. 119(C).

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    More about this item

    Keywords

    Present bias; Hyperbolic discounting; Pareto-improving tax policies; Long-term perspective preferences; Steady-state analysis;
    All these keywords.

    JEL classification:

    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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