IDEAS home Printed from https://ideas.repec.org/p/mia/wpaper/0708.html
   My bibliography  Save this paper

Optimal Second Best Taxation of Addictive Goods

Author

Listed:
  • Luca Bossi

    () (Department of Economics, University of Miami)

  • Pedro Gomis-Porqueras

    () (Department of Economics, University of Miami)

  • David L. Kelly

    () (Department of Economics, University of Miami)

Abstract

In this paper we derive conditions under which optimal tax rates for addictive goods exceed tax rates for non-addictive consumption goods in an environment where exogenous government spending cannot be nanced with lump sum taxes. Standard static models that consider revenue raising and externalities predict taxing addictive goods at a rate far in excess of that observed in the data. In contrast, our results indicate that, given reasonable parameter values for the strengths of tolerance for the addictive good, homogeneity of the addiction function and the elasticity of substitution, the tax rates are likely to be smaller than the ones implied by the static case. This is the case because high current tax rates on addictive goods tend to reduce future tax revenues, by making households less addicted in the future. Finally, we consider features of addictive goods such as complementarity to leisure that, while unrelated to addiction itself, are nonetheless common among some addictive goods. In general, such e ects are weaker in our dynamic setting since if taxing addictive goods has strong positive revenue e ects today, then taxing goods has a strong o setting e ect on future tax revenues.

Suggested Citation

  • Luca Bossi & Pedro Gomis-Porqueras & David L. Kelly, 2007. "Optimal Second Best Taxation of Addictive Goods," Working Papers 0708, University of Miami, Department of Economics.
  • Handle: RePEc:mia:wpaper:0708
    as

    Download full text from publisher

    File URL: http://moya.bus.miami.edu/~dkelly/papers/addtax9_26_07.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Olekalns, Nilss & Bardsley, Peter, 1996. "Rational Addiction to Caffeine: An Analysis of Coffee Consumption," Journal of Political Economy, University of Chicago Press, pages 1100-1104.
    2. Bossi, Luca & Gomis-Porqueras, Pere, 2009. "Consequences Of Modeling Habit Persistence," Macroeconomic Dynamics, Cambridge University Press, pages 349-365.
    3. Abel Andrew B. & Mailath George J., 1994. "Financing Losers in Competitive Markets," Journal of Financial Intermediation, Elsevier, pages 139-165.
    4. Chari, V.V. & Kehoe, Patrick J., 1999. "Optimal fiscal and monetary policy," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745 Elsevier.
    5. Grossman, Michael & Chaloupka, Frank J & Sirtalan, Ismail, 1998. "An Empirical Analysis of Alcohol Addiction: Results from the Monitoring the Future Panels," Economic Inquiry, Western Economic Association International, vol. 36(1), pages 39-48, January.
    6. Chaloupka, Frank, 1991. "Rational Addictive Behavior and Cigarette Smoking," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 722-742, August.
    7. Badi H. Baltagi & Ingo Geishecker, 2006. "Rational Alcohol Addiction: Evidence from the Russian Longitudinal Monitoring Survey," Center for Policy Research Working Papers 81, Center for Policy Research, Maxwell School, Syracuse University.
    8. Becker, Gary S & Grossman, Michael & Murphy, Kevin M, 1994. "An Empirical Analysis of Cigarette Addiction," American Economic Review, American Economic Association, pages 396-418.
    9. O'Donoghue, Ted & Rabin, Matthew, 2006. "Optimal sin taxes," Journal of Public Economics, Elsevier, pages 1825-1849.
    10. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
    11. Ted O'Donoghue & Matthew Rabin, 2003. "Studying Optimal Paternalism, Illustrated by a Model of Sin Taxes," American Economic Review, American Economic Association, pages 186-191.
    12. Parry, Ian W.H. & Laxminarayan, Ramanan & West, Sarah E., 2006. "Fiscal and Externality Rationales for Alcohol Taxes," Discussion Papers dp-06-51, Resources For the Future.
    13. Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, pages 675-700.
    14. Bentzen, J. & Eriksson, T. & Smith, V., 1997. "Rational Addiction and Alcohol Consumption: Evidence from the Nordic Countries," Papers 97-16, Aarhus School of Business - Department of Economics.
    15. Badi H. Baltagi & Ingo Geishecker, 2006. "Rational alcohol addiction: evidence from the Russian longitudinal monitoring survey," Health Economics, John Wiley & Sons, Ltd., vol. 15(9), pages 893-914.
    16. Bovenberg, A.L. & Goulder, L.H., 1996. "Optimal environmental taxation in the presence of other taxes : General equilibrium analyses," Other publications TiSEM 5d4b7517-c5c8-4ef6-ab76-3, Tilburg University, School of Economics and Management.
    17. Clotfelter, Charles T & Cook, Philip J, 1990. "On the Economics of State Lotteries," Journal of Economic Perspectives, American Economic Association, pages 105-119.
    18. Earl L. Grinols & David B. Mustard, 2006. "Casinos, Crime, and Community Costs," The Review of Economics and Statistics, MIT Press, pages 28-45.
    19. Badi H. Baltagi & James M. Griffin, 2002. "Rational addiction to alcohol: panel data analysis of liquor consumption," Health Economics, John Wiley & Sons, Ltd., vol. 11(6), pages 485-491.
    20. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, pages 38-42.
    21. Jonathan Gruber & Botond Koszegi, 2000. "Is Addiction "Rational"? Theory and Evidence," NBER Working Papers 7507, National Bureau of Economic Research, Inc.
    22. Becker, Gary S & Grossman, Michael & Murphy, Kevin M, 1994. "An Empirical Analysis of Cigarette Addiction," American Economic Review, American Economic Association, pages 396-418.
    23. McGrattan, Ellen R. & Schmitz, James Jr., 1999. "Explaining cross-country income differences," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 10, pages 669-737 Elsevier.
    24. Chari, V.V. & Kehoe, Patrick J., 1999. "Optimal fiscal and monetary policy," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745 Elsevier.
    25. Kenkel, Donald S, 1996. "New Estimates of the Optimal Tax on Alcohol," Economic Inquiry, Western Economic Association International, vol. 34(2), pages 296-319, April.
    26. Anderson, John E., 2005. "Casino Taxation in the United States," National Tax Journal, National Tax Association, pages 303-324.
    27. O'Donoghue, Ted & Rabin, Matthew, 2006. "Optimal sin taxes," Journal of Public Economics, Elsevier, pages 1825-1849.
    28. Luca Bossi & Vladimir Petkov, 2007. "Habits, Market Power, and Policy Selection," Working Papers 0702, University of Miami, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bossi, Luca & Gomis-Porqueras, Pere, 2009. "Consequences Of Modeling Habit Persistence," Macroeconomic Dynamics, Cambridge University Press, pages 349-365.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mia:wpaper:0708. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher Parmeter). General contact details of provider: http://edirc.repec.org/data/demiaus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.