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The Political Economy of Sin Taxes

  • Markus Haavio
  • Kaisa Kotakorpi

We analyse the determination of taxes on harmful goods when consumers have self-control problems. We show that under reasonable assumptions, the socially optimal corrective tax exceeds the average distortion caused by self-control problems. Further, we analyse how individuals with self-control problems would vote on taxes on the consumption of harmful goods, and show that the equilibrium tax is typically below the socially optimal level. When the redistributive effects of sin taxes are taken into account, the difference between the social optimum and equilibrium is small at low levels of harm, but becomes more pronounced when consumption is more harmful.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2650.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2650
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