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Temptation and the efficient taxation of education and labor

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  • Bethencourt, Carlos
  • Kunze, Lars

Abstract

This paper studies efficient tax policies in Ramsey’s tradition when consumers face temptation and self control problems in inter-temporal decision making. We embed the class of preferences developed by Gul and Pesendorfer into a simple two-period life-cycle model and show that education should be effectively subsidized if the elasticity of the earnings function is increasing in education and if temptation problems are sufficiently severe. By contrast, if temptation problems are not sufficiently severe, efficient education policy calls for taxing education. Moreover, efficient labor taxation calls for subsidizing qualified labor if the strength of temptation is sufficiently large.

Suggested Citation

  • Bethencourt, Carlos & Kunze, Lars, 2016. "Temptation and the efficient taxation of education and labor," MPRA Paper 75141, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:75141
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    References listed on IDEAS

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    Cited by:

    1. Maria Arvaniti & Tomas Sjögren, 2020. "Temptation in Consumption and Optimal Redistributive Taxation," CER-ETH Economics working paper series 20/339, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.

    More about this item

    Keywords

    temptation; self control; second-best efficient taxation; inverse elasticity rule; education policy;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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