No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
Taxing Sin Goods and Subsidizing Health Care*
Abstract
We consider a two-period model. In the first period, individuals consume two goods: one is sinful and the other is not. The sin good brings pleasure but has a detrimental effect on second period health and individuals tend to underestimate this effect. In the second period, individuals can devote part of their saving to improve their health status and thus compensate for the damage caused by their sinful consumption. We consider two alternative specifications concerning this second period health care decision: either individuals acknowledge that they have made a mistake in the first period out of myopia or ignorance, or they persist in ignoring the detrimental effect of their sinful consumption. We study the optimal linear taxes on sin good consumption, saving and health care expenditures for a paternalistic social planner. We compare those taxes in the two specifications. We show under which circumstances the first best outcome can be decentralized and we study the second best taxes when saving is unobservable.
... The effects of the individuals' health status are felt only at the end of the period. However, at the point of decision making, the individuals tend to underestimate the importance of their health due to a lack of knowledge, myopia or a present-bias (see, e.g., Cremer et al., 2012;Laibson, 1997;O'Donoghue & Rabin, 2003. 3 This implies that both the monetary and time investments in health of the two individual types are too low compared to the first-best optimum. The decentralization of the first-best thus requires personalized subsidies on both types of investments (together with personalized lump-sum taxes to finance the subsidies and to ensure redistribution between individual types). ...
... 5 Moreover, they do not derive optimal policy but rather only look at the effects of taxes and subsidies. 6 Second, the paper clearly relates to the literature on the optimal policy addressing individuals' health-related choices when individuals have behavioral biases (e.g., Arbex & Mattos, 2019;Arnabal, 2021;Aronsson & Sjögren, 2016;Aronsson & Thunström, 2008;Cheng & Chu, 2018;Cremer et al., 2012;Gruber & Köszegi, 2001;O'Donoghue & Rabin, 2003Pestieau & Ponthiere, 2012). Differently from this paper, these studies focus on the consumption of unhealthy goods, and most of them analyze optimal taxes on such goods (the so-called sin taxes), with the exceptions of Aronsson and Thunström (2008) who advocate subsidies on wealth and health capital, Arbex and Mattos (2019) who propose an earnings subsidy and Cremer et al. (2012) as well as Cheng and Chu (2018) who, in addition to studying sin taxes, consider a subsidy on health care. ...
... 6 Second, the paper clearly relates to the literature on the optimal policy addressing individuals' health-related choices when individuals have behavioral biases (e.g., Arbex & Mattos, 2019;Arnabal, 2021;Aronsson & Sjögren, 2016;Aronsson & Thunström, 2008;Cheng & Chu, 2018;Cremer et al., 2012;Gruber & Köszegi, 2001;O'Donoghue & Rabin, 2003Pestieau & Ponthiere, 2012). Differently from this paper, these studies focus on the consumption of unhealthy goods, and most of them analyze optimal taxes on such goods (the so-called sin taxes), with the exceptions of Aronsson and Thunström (2008) who advocate subsidies on wealth and health capital, Arbex and Mattos (2019) who propose an earnings subsidy and Cremer et al. (2012) as well as Cheng and Chu (2018) who, in addition to studying sin taxes, consider a subsidy on health care. 7 The paper by Aronsson and Sjögren (2016) is probably the closest to this paper in terms of the policy analyzed since it studies a non-linear income tax and a linear commodity tax (with the focus, however, on taxing unhealthy goods). ...
Time is often an important ingredient of a healthy lifestyle. Starting from this observation, this paper studies optimal public policy concerned with promoting healthy choices taking into account both monetary and time investments in health. Individuals tend to underestimate the importance of their health while making decisions, which makes their investments too low compared to the first‐best. While the decentralization of the first‐best requires personalized subsidies on both time and monetary investments, this may be problematic due to informational issues. In a second‐best world where individual productivities and time investments are publicly unobservable, whereas monetary investments are observable in an anonymous way, the paper considers a policy with a non‐linear income tax and a linear subsidy on monetary health investments. If there are no incentive concerns, all other things equal, monetary investments complementary (substitutable) to time investments should be subsidized more (less) than those independent of time use. The addition of incentive concerns demonstrates that optimal subsidization of monetary health investments is less straightforward than one might think. Overall, the time ingredient in the production of health does play a role in the optimal policy design, affecting not only the subsidy on monetary health investments but also the income taxation.
... For that purpose, we borrow the two-period model of sin taxes from Cremer et al. (2012). Their study adds two interesting traits to the issue of sin taxes. ...
... For the latter, in contrast, myopic consumers (with dual self) have problems measuring future benefits and costs. Thus, it requires that the early self's decisions be corrected to conform with the preferences of the later self (Cremer et al. 2012). 2 In our model, discounting future consumption is similar to discounting future money, since future money is spent on consuming a single numeraire good. ...
... For persistent-error myopes (those who stick to their mistaken consumption plans), the optimal policy mix requires a subsidy on savings and a tax on sin goods. As for health care, we find that if the degree of myopia concerning health quality is stronger than that concerning future consumption, health care investment should be subsidized as illustrated by Cremer et al. (2012). However, in particular, if the degree of myopia concerning future consumption is stronger, it may be necessary to tax health care. ...
In this paper, we examine the optimal policies for sin goods and health care in a two-period economy. Individuals are myopic in the sense that they undervalue the utilities of future consumption and health quality. When investing in health care in the second period, individuals who have previously made myopic decisions may persist in their shortsighted consumption plans (persistent error) or recognize their mistakes (dual self). We show that, for persistent-error myopes, the first-best policy mix requires a subsidy on savings and a tax on sin goods. The health care should be taxed (subsidized) if the degree of myopia concerning future consumption is larger (smaller) than that concerning health quality. For dual-self myopes, the optimal policy for sin goods can be either a tax or a subsidy, depending on the relative degrees of myopia and the property of the health quality function.
... The preventive versus curative dilemma was studied by Cremer et al. (2012) in an economy where individuals live for two periods: the first one is of length one and the second has a length that depends on private investment in health and on some sinful consumption in the first period (i.e. alcohol, cigarettes, junk food, etc.). ...
... They do not anticipate correctly the effect an health lifestyle and preventive measure taken in the first period on the length of the second. Cremer et al. (2012) study the design of the optimal public intervention when agents differ in terms of their farsightedness. They show that sin goods should be taxed, to an extent that depends on individual myopia/ignorance. ...
... Note that, among the two cases considered in Cremer et al. (2012), the prevalence of regrets is the most widespread. Recent surveys showed that about 85% of smokers aged 65 years regret having started to smoke, in the sense that, if they could change the past, they would not have started to smoke (see Slovic 2001, Jarvis et al. 2002, Fong et al. 2004. ...
Life expectancy at birth has more than doubled in Europe since the early 19th century. This demographic trend constitutes a major victory against scarcity, but raises also deep challenges to the Welfare State, concerning the sustainability and the equity of the social protection system. This paper surveys recent developments in the economic analysis of longevity, both at the positive and the normative levels. Taking mortality risks into account is shown to affect the study of the life cycle model significantly, in particular concerning the strength of life horizon effects. It raises also, at the level of normative foundations for policy-making, a dilemma between ex ante and ex post valuations. Finally, we explore the design of policy reforms under varying longevity, in fields including preventive and curative policies, education, pension, and wealth taxation.
... Sin goods share with demerit goods (Musgrave, 1957(Musgrave, , 1958Scitovski, 1992) the contrast to certain community preferences, in that an increasing social value is now given to health. There is, however, a feature that distinguishes sin goods from demerit goods: overconsumption of sin goods may be a mistake from the individual point of view too, in that consumers themselves regret it afterwards (see, for instance, Cremer et al, 2012). This is because people may not (fully) take into account the damage to their own health deriving from the consumption decision. ...
... For instance, Lockwood and Taubinsky (2017) consider the options of 'recycling' resources to increase the progressivity of the income tax or for expenditure programmes that benefit the poor; they argue that they will be effective if the consumption of sin goods depends on income elasticity, rather than on tastes. Cremer et al (2012) and Wang et al (2017) propose subsidies for health investment. ...
We present an analytical literature review on optimal sin taxes. After identifying the distinctive features of sin goods, we develop a simple, encompassing model of the taxation of sin goods that allows for treating the main models found in the literature as subcases. We derive the optimal sin tax rates, while also considering the subsidisation of healthy goods. We then discuss the Pareto-improvement result obtained in the theoretical literature, confronting it with the debate on the regressivity of this kind of taxation. We highlight the crucial role of the interaction of tastes, self-control problems and poverty when deriving policy conclusions from theoretical models.
... In a general framework, O' Donoghue andRabin (2003, 2006) show that when some agents suffer from misperception of the health damage caused by sin good consumption, introducing a sin tax improves welfare and it may even be Pareto improving under some circumstances. Allowing agents to mitigate the damage from sin good consumption by investing in health care, Cremer et al. (2012) derive optimal formulas for sin taxes and health care subsidies. They find that the optimal sin tax will depend on the degree of substitutability between health care investments and sin good consumption. ...
... 14 At least 2.5% of the world population consume cannabis according to the study of WHO (2016). 15 Following Cremer et al. (2012), we make use of the concept of average compensation, so that the income the agent receives to compensate the tax increase depends on the average demand for the sin good in question, rather than on its own demand. sum transfers and taxes for each type of sin good. ...
Sin good consumption entails health damage, which is in general not fully perceived by individuals, what results in its overconsumption. One way to tackle this problem is to tax these unhealthy goods. However, not all the individual choices that affect health status can be easily observed and effectively taxed by the government. This paper considers a setting where individuals can consume two types of sin goods that differ in their observability (taxability) by the government. As a benchmark, the first‐best taxes for the observable and non‐observable sin good are derived, considering homogeneous individuals. In the second‐best setting, where observability on sin good consumption is limited, the rule for the taxable sin good is shown to depend on the degree of complementarity or substitutability with the unobservable sin good. Finally, redistributional considerations are incorporated by extending the analysis to a setting where individuals differ in their wealth and in their degree of misperception of the health damage caused by sin good consumption. Policy implications are illustrated considering physical inactivity and illicit drugs as examples of non‐taxable sin goods, while alcohol, tobacco, fat and sugar account for the taxable sin goods
... The main feature distinguishing sin tax from other indirect taxes imposed on selected groups of products is its preventive effect. A characteristic feature of a public health tax is the assumption that there is a decline in self-control and overconsumption of harmful products in society (7). The overriding role of sin tax, as in the case of other taxes, is not to ensure revenue for the state budget, but to prevent the consumption of harmful products by increasing their price. ...
... Główną cechą odróżniającą sin tax od innych podatków pośrednich nałożonych na wybrane grupy produktów jest jego działanie profilaktyczne. Charakterystyczne dla podatku zdrowia publicznego jest założenie, że w społeczeństwie dochodzi do spadku samokontroli oraz nadkonsumpcji produktów szkodliwych (7). Nadrzędną rolą sin tax nie jest, jak w przypadku innych podatków, a specific component (a fixed charge per 1 g of sugar in sweetened beverages in the United Kingdom) (8). ...
Objective:
The aim of the paper is to present in a synthetic way the sin tax tool, the mechanisms of its functioning, challenges related to the tool and examples of the application of this tax in selected countries.
Material and method:
In accordance with Agency for Health Technology Assessment and Tariff System guidelines, a review of literature in the PubMed and Cochrane scientific databases was conducted on the basis of search searches. They searched grey literature and institutional documents of health organizations and legal acts of selected countries that introduced sin tax in the period since 2005.
Results:
Sin tax is a public health tax that aims to reduce the negative health attitudes of the population through the use of a price regulation mechanism. In order to prepare an effective economic tool, it is important to model it properly. Today, 35 countries around the world have introduced an additional tax on tobacco products, which is wholly or partly used for health care. In 9 countries, targeted taxes have been introduced on a component whose excessive consumption adversely affects health (sugar, salt, fats).
Conclusions:
Sin tax is a tool that, if properly implemented, can contribute to changing consumer behaviour and thus have a positive impact on the health of the population. It should be remembered that decisions taken at the central level, especially those concerning the introduction of new taxes, should be supported by reliable analyses. Although sin tax is undoubtedly an effective and increasingly widely used tool, it is not free from defects. One of its major drawbacks is its regressive character and potential negative social perception.
... 10 Let us consider the decentralized problem with a tax (τ t ) on the unhealthy activities. We use the corresponding tax revenues to subsidize (s t ) the healthy activities (see for instance Cremer et al., 2010, for another theoretical contribution). Individuals maximize U t (c t , v t , h p t+1 , π t ) subject to (4) and the modified budget constraint ...
... Evidence supporting these two assumptions has been reviewed in Section 2. 7 For a theoretical contribution in this regard see, for instance,Cremer et al. (2010). For the empirical evidence see for exampleDavison et al. (1991, andBrownell et al. (2009). ...
We introduce a theoretical framework that contributes to the understanding of non-communicable chronic diseases' (NCDs) epidemics: even if NCDs are non-infectious diseases, they may spread due to the social transmission of unhealthy activities such as unhealthy diet, physical inactivity, and smoking. In particular, we study the intergener- ational dimension of this mechanism. We find that, due to the social transmission of NCDs, agents choose lower health conditions and higher unhealthy activities than what is socially optimal. Taxes on unhealthy activities, that may subsidize health investments, can be used to restore the social optimum. Finally, our model is consistent with the existence of regional asymmetries regarding the prevalence of obesity and NCDs.
... Potential alternatives to ensure long-term funding support could include cofinancing from the private sector (including through public-private mix) 22 and finding innovative funding resources-eg, taxing unhealthy commercial products. 47 Ultimately, investment in social protection should be arranged and matched to complement the investment in drugs and vaccine discovery. ...
As we mark World TB Day 2024, we take this opportunity to reflect on the 2023 UN General Assembly High-Level Meeting (HLM) on the fight against tuberculosis-a milestone in the commitment towards a more coordinated, comprehensive approach to end tuberculosis globally. The UN HLM declaration on the fight against tuberculosis includes a specific pledge that all people with tuberculosis should receive a social benefits package to mitigate financial hardship. However, it is not known how this specific pledge will be realised and through which concrete actions. The use of the term financial hardship instead of WHO's key End TB Strategy indicator of catastrophic costs might prove challenging for robust evaluation of both the socioeconomic impact of tuberculosis and the effectiveness of socioeconomic support strategies to mitigate this impact. Moreover, in contrast to the financial pledges made for biomedical interventions, there was an absence of explicit investment in social protection. Such investments are imperative to facilitate successful expansion of social protection to meet the needs of people with tuberculosis and their households. Successful expansion of social protection is also dependent on political commitment and protected budgets from relevant stakeholders, including across government ministries. These strategies will help to ensure that the commitments on social protection made in the UN HLM declaration are turned into tangible actions with measurable effects.
... • Ethical products "Sin goods" include tobacco or alcohol, i.e., goods whose consumption has adverse health effects and therefore create a burden for the general public (Cremer et al, 2012). "Ethical products" are products where consumers buy intangibility, justice and perhaps conscience. ...
This in-depth analysis explores how EU trade policy tools can effectively tackle the import and circulation of forced labour products in the European single market in order to help implement the Commission’s decent work worldwide initiative. The report compares the option of an EU import ban on forced labour goods to the option of prohibiting the marketing of such products, in light of the Commission’s proposal for a Regulation on prohibiting products made with forced labour on the Union market published on 14 September 2022. The paper also analyses the likely economic and social impact of the proposed measures (in the EU and abroad), as well as the legal feasibility of these tools.
... ,Nielsen (2016): 56.11 Cremer et al. (2012): 101-123.12 Allcott, Lockwood, Taubinsky (2019): 202. ...
Badania opisane w niniejszym artykule zostały podjęte w związku z niedawną aktywnością polskiego ustawodawcy, który wprowadził opłatę od środków spożywczych do ustawy o zdrowiu publicznym. Opłata ta ma stanowić jedno z dodatkowych źródeł dochodu państwa i być wydatkowana na cele poprawy zdrowia publicznego. Celem niniejszych badań było zweryfikowanie hipotezy, że opłata od środków spożywczych stanowi realizację koncepcji sin tax obowiązującej w nauce prawa podatkowego. W toku badań została wykorzystana analiza krytyczna, w tym analiza lingwistyczna aktów prawnych. Ponadto wykorzystano analizę dorobku doktryny prawa finansowego dotyczącego koncepcji sin tax. Niniejsze badania doprowadziły do wniosków, że wprowadzona do polskiego porządku prawnego opłata od środków spożywczych stanowi formę sin tax oraz realizuje zarówno funkcję stymulacyjną, jak i alokacyjną prawa podatkowego.
... Our paper relates to two branches of the health economics literature. One deals with optimal health policy but disregards general equilibrium effects and macroeconomic implications (Andersen & Bhattacharya, 2014;Cremer et al., 2012;Leroux et al., 2011) or health externalities (Canta et al., 2016;Jack & Sheiner, 1997;Jaspersen & Richter, 2015). The other one is concerned with the implications of health investments on the macro-economy in the presence of side-effects of health capital but does not focus on optimal policy. 2 Several studies examine how health spending lowers mortality and affects growth in developing countries. ...
People value healthy ageing but may underinvest in health‐improving preventive care. This arises when they ignore the beneficial effects of healthy ageing on public health expenditures and hence on the tax burden of future generations. This health externality justifies public intervention. We build an overlapping generations model with a government subsidizing investment in health by the young generation and paying the health care costs of the old generation. We find that the welfare‐maximizing subsidy rate depends positively on the health externality and the size of health care costs, and negatively on the discount factor. The subsidy rate should therefore be high when prevention is cost‐effective and when the population is careless about the future. Moreover, the welfare‐maximizing subsidy rate is lower than the health‐maximizing rate but higher than the capital‐maximizing rate. This underlines the trade‐off for a policy maker between health and economy.
... Our paper links two important strands of the theoretical literature. First, there is a literature on paternalistic taxation of sin goods, for instance, O' Donoghue andRabin (2003, 2006), Kotakorpi (2011, 2016) and Cremer et al. (2012Cremer et al. ( , 2016. In contrast to our analysis, all these studies assume monotonically increasing instead of U-shaped health costs. ...
If an individual’s health costs are U-shaped in weight with a minimum at some healthy level and if the individual has both self-control problems and rational motives for over- or underweight, the optimal paternalistic tax on calorie intake mitigates the individual’s weight problem (intensive margin), but does not induce the individual to choose healthy weight (extensive margin). Implementing healthy weight by a calorie tax is not only inferior to paternalistic taxation, but may even be worse than not taxing the individual at all. With heterogeneous individuals, the optimal uniform paternalistic tax may have the negative side effect of reducing calorie intake of the under- and normal weights. We confirm these theoretical insights by an empirical calibration to US adults.
... Behavioral economists argue that individualized sumptuary taxes raise the price of 'sinful activities' and help individuals overcome self-control problems. They argue that in case of 'sinful activities' people suffer frequently from cognitive biases as they overstate the current benefits of consumption and underestimates the costs in the future (Allcott et al. 2019;Cremer et al. 2012;Gruber & Koszegi, 2001Haavio & Kotakorpi, 2011;O'Donoghue & Rabin, 2003. Without the implementation of sin taxes, these authors argue, people will engage in excessive amounts of sinful activities as they have a hard time correctly calculating the negative future consequences of their present consumption. ...
Traditionally, economists and tax theorists justify taxation by means of externalities. In recent years, both scholars and policymakers have begun advocating ‘sin taxes’ on goods whose consumption causes ‘internalities’: unaccounted-for costs that a person imposes on herself, not on others. In this paper, we argue that sin taxes rest on a static model of individual choice. They retain neoclassical rationality—with its endorsement of stable and context-independent preferences—as a normative benchmark for good, i.e., welfare-increasing choice. We contrast this model with a more dynamic understanding of choice in which preferences are context-dependent, evolving, and open to individual processes of experimentation. Such a dynamic understanding of choice is backed by recent findings in psychology and behavioral economics and is integral to the political economy of John Stuart Mill. Contributing to the most recent literature in behavioral welfare economics, we argue that the reality of dynamic and evolving preferences animates a contractarian perspective on public policy which, in turn, provides strong arguments against the sin-tax agenda and supports preference-neutral tax rules.
... Behavioral economists argue that individualized sumptuary taxes raise the price of 'sinful activities' and help individuals overcome self-control problems. They argue that in case of 'sinful activities' people suffer frequently from cognitive biases as they overstate the current benefits of consumption and underestimates the costs in the future (Gruber andKoszegi 2001, 2002;Rabin 2003, 2006;Cremer et al. 2012;Haavio and Kotakorpi 2011;Allcott, Lockwood, and Taubinsky 2019). Without the implementation of sin taxes, these authors argue, people will engage in excessive amounts of sinful activities as they have a hard time correctly calculating the negative future consequences of their present consumption. ...
Traditionally, economists and tax theorists justify taxation by means of externalities. In recent years, both scholars and policymakers have begun advocating 'sin taxes' on goods whose consumption causes 'internalities': unaccounted-for costs that a person imposes on herself, not on others. In this paper, we argue that sin taxes rest on a static model of individual choice. They retain neoclassical rationality-with its endorsement of stable and context-independent preferences-as a normative benchmark for good, i.e., welfare-increasing choice. We contrast this model with a more dynamic understanding of choice in which preferences are context-dependent, evolving, and open to individual processes of experimentation. Such a dynamic understanding of choice is backed by recent findings in psychology and behavioral economics and is integral to the political economy of John Stuart Mill. Contributing to the most recent literature in behavioral welfare economics, we argue that the reality of dynamic and evolving preferences animates a contractarian perspective on public policy which, in turn, provides strong arguments against the sin-tax agenda and supports preference-neutral tax rules.
... A common perspective is that sin taxes can correct individual ignorance toward detrimental effects on health (e.g. O'Donoghue and Rabin, 2006;Cremer et al., 2012), the so-called paternalistic view. However, an important aspect is the presence of fiscal externalities. ...
We present a unified approach to analyze sin taxes, by allowing for a non-paternalistic view, stemming from crowding-out externalities, in addition to the paternalistic view. Analytical results show the additive property between the Pigouvian and the efficiency elements in optimal sin taxes. The Pigouvian element can be decomposed into externality components additively. Although the Pigouvian elements are lower in the second-best, the second-best optimal sin taxes are not necessarily lower due to the presence of the efficiency element. Calibration results show that the implementation of sin taxes has double-dividends, which improve not only health but also economic performance and welfare.
... Second, behavioral and informational biases can explain that a consumer's diet is not consistent with her own valuation of her health. Several articles have analyzed the optimal taxation of unhealthy goods (Gruber and Köszegi, 2001;O'Donoghue and Rabin, 2006a;Cremer et al., 2012;Allcott et al., 2014Allcott et al., , 2018 when people imperfectly internalize the effect of these goods on their own health. There are many models of behavioral biases (e.g. ...
This is a comment on the paper by Irz et al. (2015) in this journal, on nutritional recommendations. Irz et al. (2015) propose to compute the cost of a nutritional constraint as the consumer loss of surplus, derived from their observed choices. Introducing behavioral biases into an extended version of their model, I show that their proposed methodology implicitly assumes that consumer dietary choices do not involve any health considerations. The cost per quality-adjusted life year that they compute should be corrected by the size of the bias of consumers to be compared with benchmark evaluations.
... Cash et al., 2004;Leicester and Windmeijer, 2004;Kamerow, 2010;Brownell and Frieden, 2009;. The optimal tax on unhealthy food has been shown to be positive in paternalistic models where individuals exhibit present-bias in their consumption choices Rabin, 2003, 2006;Haavio and Kotakorpi, 2011;Cremer et al., 2012). ...
... Related products are sometimes referred to in the litera ture as merit (or demerit) goods. Some interesting papers on this subject are presented by Besley (1988) and Pestieau et al. (2012). ...
This study examines the structure of optimal commodity tax rates in a many-person many-goods static computational model using segmented LES utility. One of the major findings is that with non-linear Engel curves and linear income tax, optimal commodity tax rates will be progressive and highly dispersed under logarithmic utility specifications. The dispersion of tax rates is reduced if the inequality aversion rate of society is low. With exogenously given non-optimal and non-linear income tax schedules, usually there is still a need for differentiated and progressive indirect taxation. These findings are in marked contrast to the continuing preoccupation of much of the literature with uniform indirect taxation for redistributive purposes. The results also indicate that if tax evasion incurs substantial deadweight costs, it usually reduces optimal tax rates by over a half of the evasion/revenue ratio of the product, with the reduction being larger for necessities and smaller for luxuries. Private compliance costs and government administration costs reduce optimal tax rates by a similar amount to the share of these costs from taxes. In a model with linear income tax, the effect of externalities on optimal tax rates substantially exceeds the corresponding Pigouvian tax rates or subsidies. The main benefit of higher taxes on leisure complements than leisure substitutes appears to be in boosting tax revenue for redistribution, rather than in improving the utility position of those paying the taxes. The effect of complexities such as tax evasion, administrative costs, externalities and leisure complements/substitutes on redistribution is not neutral. Generally, these factors tend to increase the progressivity of optimal commodity tax rates.
... On the other hand, economists support these measures for two reasons. First, individuals do not really appreciate the true relationship between diet and disease and prefer short term pleasures to the detriment of long term welfare and second, they do not bear the full health care cost of diseases related to diet (19,20). ...
Whereas public information campaigns have failed to reverse the rising trend in obesity, economists support food taxes as they suggest they can force individuals to change their eating behavior and make the agro-food industry think more about healthy food products. Excise taxes based on the unhealthy nutrient content would be more effective since they impact more on unhealthy food products than VAT (value-added-tax) taxes. Taxes based only on junk food products would avoid perverse effects on healthy nutrient. However, as eating behavior of consumers is complex, a modeling analysis would allow to assess unexpected effects on other unhealthy nutrients or products.
... Within this framework, Cremer et al (2012) study the optimal design of taxation. As expected, sin goods should be taxed, but curative health spending should not necessarily be subsidized, particularly when there is myopia. ...
One of the greatest success stories in our societies is that people are living longer, life expectancy at birth being now above 80 years. Whereas the lengthening of life opens huge opportunities for individuals if extra years are spent in prosperity and good health, it is however often regarded as a source of problems for policy-makers. The goal of this paper is to examine the key policy challenges raised by increasing longevity. For that purpose, we first pay attention to the representation of individual preferences, and to the normative foundations of the economy, and, then, we consider the challenges raised for the design of the social security system, pension policies, preventive health policies, the provision of long term care, as well as for long-run economic growth.
... That net utility gain includes 21 The assumption of perfect annuity markets for each risk class is a simpli…cation made for conveniency (see Brown, 2007). See Cremer et al (2010) for the study of collective annuitization. 22 To reduce the number of parameters in our model, the price of e i is normalized to 1. ...
This paper applies the analytical tools of optimal taxation theory to the design of the optimal subsidy on preventive behaviours, in an economy where longevity varies across agents, and depends on preventive expenditures and on longevity genes. Public intervention can be here justified on three grounds: corrections for misperceptions of the survival process and for externalities related to individual preventive behaviour, and redistribution across both earnings and genetic dimensions. The optimal subsidy on preventive expenditures is shown to depend on the combined impacts of misperception, externalities and self-selection. It is generally optimal to subsidize preventive efforts to an extent depending on the degree of individual myopia, on how productivity and genes are correlated, and on the complementarity of genes and preventive efforts in the survival function.
... The first terms on the right-hand side of (10) and of (11) are similar to (9) and are greater than one. In (11), the additional term inside brackets results from the introduction of the incentive constraint and is lower than one since ...
This paper studies a problem of non linear taxation when individuals have different longevities resulting from a non-monetary effort (like exercising). We first present the laissez-faire and the first best. Like Becker and Philipson (1998), we find that the laissez-faire level of effort is too high compared with the first best, because individuals do not internalize the impact of survival on the return of their savings. We also claim that because of its non-monetary form, effort is not contractible. That is why we modify our framework and assume, for the rest of the paper, that effort is determined by the individual while the social planner only allocates consumptions. It turns out that, under full information, a tax on the return of annuitized savings is desirable for both types. This tax is higher for the low-survival individual. Under asymmetric information, the low-survival individual still faces a tax while the high-survival individual might now face a positive or negative tax on annuities. Interestingly, our results depend on the value of life.
In this paper we argue that Irving Fisher (1867–1947) is an unacknowledged pioneer of modern behavioral economics. Fisher’s behavioralist orientation is evident in his writings on alcohol prohibition. In these works, Fisher argued that behavioral anomalies prevent individuals from making rational choices regarding alcohol consumption. Fisher thought these anomalies arose from three sources: 1) incomplete information; 2) limited cognitive abilities; and 3) lack of willpower. These are essentially the same barriers to rational choice identified by modern-day New Paternalists. Therefore, we argue that Fisher’s work on Prohibition was a pioneering academic achievement that anticipated recent developments in economics, and not an unscientific diatribe, as previous commentators have presumed. Unlike modern-day ‘New Paternalists,’ however, Fisher rejected minor alterations to the choice architecture and advocated outright prohibition instead. This helps to illustrate a potential slippery-slope problem with modern New Paternalist arguments that should be addressed.
We examine the optimal design of policies directed at regulating tobacco consumption through two types of instruments: taxation and anti-smoking mass media campaigns. We find that the main role of taxation is to correct for the population-average internal costs of smoking, while anti-smoking campaigns serve a complementary role. Namely, they add to the social welfare benefits of tobacco regulation as they are relatively more effective than taxation at discouraging smoking by individuals characterized by low degrees of self-control and high smoke-related health harms.
Choices are sometimes distorted by internalities or externalities. This paper considers a setting in which the distortion cannot be taxed directly, and asks how a policymaker should choose a proxy variable to tax instead. We derive a criterion for when one proxy should be preferred to another, and consider a range of factors with implications for this criterion. These factors are (i) sensitivity to the tax rate, (ii) how accurately the taxed variable approximates the distorted variable, (iii) susceptibility to offsetting behavior, and (iv) consumer heterogeneity. Our analysis is illustrated with a comparison between ad valorem and volumetric taxes on sugar‐sweetened beverages.
Our societies are witnessing a steady increase in longevity. This demographic evolution is accompanied by some convergence across countries, but at the same time substantial longevity inequalities persist within nations across income classes. This Element aims to survey some crucial implications of changing longevity on the design of optimal public policy. For that purpose, it first focuses on some difficulties raised by risky and varying lifetime for the representation of individual and social preferences. Then, it explore some central implications of changing longevity for optimal policy making, regarding prevention against premature death, pension policies, education, health care and long-term care. The author distinguishes between the case when longevity is partially the responsibility of individuals and the case when longevity is plainly exogenous.
If consumption of unhealthy food is excessive, then a policymaker might respond with a corrective tax. However, she might supplement the tax with a regulatory standard that limits the concentration of an unhealthy ingredient. A tax can restore social efficiency without supplemental regulation if all of four of the following conditions are satisfied: The tax is nutrient specific, the market structure is perfect competition, the magnitude of the distortion is the same across all consumers, and consumers do not react to the tax by substituting to untaxed foods that also have unhealthy ingredients. But if any of these conditions are not met, then there can be benefits to supplementing a corrective tax with a standard.
Cambridge Core - Economic Theory - Escaping Paternalism - by Mario J. Rizzo
We characterize the first-best earnings subsidy when agents are heterogeneous with respect to present-biased preferences and cognitive skills. When agents’ health and human capital biased allocations affect not only welfare but also their labor earnings, a single subsidy corrects for agents’ mistaken decisions. We highlight two novel features of paternalistic interventions: the effects of agents’ decisions on the economy's supply side, through future productivity, and the role of cognitive skills on individual's optimal trade-off between human capital accumulation and leisure. We compare this optimal subsidy to an alternative policy package.
The goal of this paper is to better understand firms' strategic reactions to nutritional policies targeting food quality improvements and to derive optimal policies. We propose a model of product differentiation, taking into account the taste and health characteristics of products. We study how two firms react to alternative policies: an MQS policy, linear taxation of the two goods on the market, and taxation of the low-quality good. The MQS and the taxation of the low-quality product are the preferred options by a social planner. If taste is moderately important, the MQS policy is chosen by a populist and a paternalist social planner. If taste is a major component of choice, the populist planner chooses to tax the low-quality product whereas the paternalist planner prefers the MQS policy. Finally, for a paternalist social planner, an MQS-based policy always allows for higher levels of welfare than an information policy alone.
An unhealthy good causes health issues in the long run. It creates a misperceived utility loss and increases health care costs. Conversely, a healthy good provides misperceived utility gains and reduces health care costs. Individuals differ in income and in their degree of misperception; they vote over a fat tax according to their misperceived utility. A fraction of the tax proceeds is “earmarked” to reduce health insurance premiums; the remainder finances a subsidy on the healthy good. This earmarking rule is determined to maximize welfare, anticipating the induced political equilibrium. The equilibrium fat tax is always lower than the utilitarian level. This is not necessarily true with a Rawlsian objective. The determination of the earmarking rule is complex. Even in the utilitarian case, it is not just used to boost political support for the fat tax. Instead, it may involve a tradeoff between fat tax and healthy good subsidy.
Because soft drink (SD) consumption is considered to be a contributor to the ‘epidemic’ of obesity, there is a growing interest in evaluating the impact on SD consumption of alternative tax policies. In this paper, we propose a methodology to evaluate the impact of taxation of a food market taking into account the strategic price response of both manufacturers and retailers. We apply this methodology to the French SD market and simulate the impacts of ad valorem and excise taxes. We find that firms behave differently when facing an ad valorem tax or an excise tax. An excise tax is overshifted to consumer prices while an ad valorem tax is undershifted to consumer prices. We find that an excise tax based on the sugar content of SD is the most effective at reducing SD consumption. Our results also indicate that ignoring strategic pricing by firms leads to misestimations of the impact of taxation by between 15% and 40% depending on the products and the tax implemented. In the short-term, that is, ignoring positive long-term health effects, a €9 cents/l excise tax has a small negative welfare effect (about €1/person/year).
Our societies are witnessing a steady increase in longevity. This demographic evolution is accompanied by some convergence
across countries, whereas substantial longevity inequalities persist within nations. The goal of this article is to survey
some crucial implications of changing longevity on the design of optimal public policy. For that purpose, we first focus on
some difficulties raised by risky and varying lifetime for the representation of individual and social preferences. Then,
we explore some central implications of changing longevity for optimal policy making, regarding prevention against premature
death, pension policies, and long-term care. (JEL codes: H21, H55, I12, I13, J10)
This paper studies implementation of the social optimum in a model of habit formation. We consider taxes that address inefficiencies due to negative consumption externalities, imperfect competition, and self-control problems. Our contributions are to: i) account for producers’ market power; and ii) require implementation to be robust and time consistent. Together, these features can imply significantly lower taxes. We provide a general characterization of the optimal tax rule and illustrate it with two examples.
This paper shows that the combination of habit formation - present consumption creating additional consumption needs in the future - and myopia may explain why some retirees are forced to 'unretire', i.e., unexpectedly return to work. It also shows that when myopia about habit formation leads to unretirement there is a case for government's intervention. In a first-best setting the optimal solution can be 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. We study the design of consumption taxes in such a setting when myopic individuals differ in productivity.
In this paper, we analyze the implications of the effective taxation of labor for profits and, hence, the decisions made by multinational enterprises concerning the location of their headquarters. If a higher employee-borne tax burden reduces manager effort, it should also negatively affect firm profits and the location of the headquarters. We compile data on personal income tax profiles for 52 economies and the year 2002 at different moments of the distribution of gross wages. Our findings suggest that higher employee-borne labor taxes are less conducive to the location of headquarters and foreign direct investment stocks in a given host economy.
We develop a model in which workers tend to work too much when young because they can not or do not want to see the consequences on their health and on their capacity to work for a longer period. To force them to better distribute their work efforts over
This paper reviews a number of recent contributions that study pension design with myopic individuals. Its objective is to explore how the presence of more or less myopic individuals affects pension design when individuals differ also in productivity. This double heterogeneity gives rise to an interesting interplay between paternalistic and redistributive considerations, which is at the heart of most of the results that are presented. The main part of the paper is devoted to the issue of pension design when myopic individual do not save “enough” for their retirement because their “myopic self” (with a high discount rate) emerges when labor supply and savings decisions are made. Some extensions and variations are considered in the second part. In particular we deal with situations where labor disutility or preferences for consumption are subject to “habit formation” and where sin goods have a detrimental effect on second period health. Myopic individuals tend to underestimate the effects of both habit formation and sinful consumption, which complicates public policy.
We report results of an experiment on prices and demand in a fantasy-based virtual world. A virtual world is a persistent, synthetic, online environment that can be accessed by many users at the same time. Because most virtual worlds are built around a fantasy theme, complete with magic, monsters, and treasure, there is considerable skepticism that human behavior in such environments is in any way “normal”. Our world, “Arden”, was designed to test whether players in a typical fantasy environment were economically “normal.” Specifically, we tested whether fantasy gamers conform to the Law of Demand, which states that increasing the price of a good, all else equal, will reduce the quantity demanded. We created two exactly equivalent worlds, and randomly assigned players to one or the other. The only difference in the two worlds was that the price of a single good, a health potion, was twice as high in the experimental world than in the control. We allowed players (N = 43) to enter and play the environment for a month. We found that players in the experimental condition purchased 43.1 percent fewer of the potions, implying a demand elasticity of -0.431. This finding is well within the range one expects for normal economic agents. We take this as evidence that the Law of Demand holds in fantasy environments, which suggests in turn that fantasy gamers may well be economically normal. If so, it may be worthwhile to conduct controlled economic and social experiments in virtual worlds at greater scales of both population (thousands of users) and time (many months).
Recent theories endogenize the attitude endowments of individuals, assuming that they are shaped by the attitudes of parents
and other role models. This paper tests empirically for the relevance of three aspects of the attitude transmission process
highlighted in this theoretical literature: (1) transmission of attitudes from parents to children; (2) an impact of prevailing
attitudes in the local environment on child attitudes; and (3) positive assortative mating of parents, which enhances the
ability of a parent to pass on his or her attitudes to the child. We focus on two fundamentally important attitudes, willingness
to take risks and willingness to trust others. We find empirical support for all three aspects, providing an empirical underpinning
for the literature. An investigation of underlying mechanisms shows that socialization is important in the transmission process.
Various parental characteristics and aspects of family structure are found to strengthen the socialization process, with implications
for modeling the socialization production function and for policies focused on affecting children's non-cognitive skills.
The paper also provides evidence that the transmission of risk and trust attitudes affects a wide variety of child outcomes,
implying a potentially large total effect on children's economic situation.
Using an optimal taxation model combined with a previously neglected scheme of public provision of private goods, we show that there is an efficiency gain if public provision of selected goods replaces market purchases and that efficiency requires marginal income tax rates to be higher than if the goods were purchased in the market. Part of the marginal tax serves the same role as a market price and conveys information about a real social cost of working more hours. It might be that economies with higher marginal tax rates have less severe distortions than economies with lower marginal tax rates. (JEL H21, H42, I38)
I use a unique dataset to estimate the relationship between time preferences, social capital, and the decision to start and quit smoking. I find impatient respondents do not differ much from patient ones, but quasi-hyperbolic respondents tend to smoke more often and have much more difficulties quitting. I also find that trust in the community protects from starting and helps quitting, but sense of control encourages starting smoking. These preliminary results strongly suggest that smokers form a heterogeneous population: I argue that such heterogeneity means that taxes on cigarettes are a blunt and inefficient instrument of public health.
This paper aims to explore the sensitivity of longevity-adjusted measures of income, which have become increasingly popular as indicators of basic standards of living. For that purpose, longevity-adjusted income measures are computed for post-war Japan under various sets of postulates, concerning the temporal horizon regarded as relevant for the measurement of welfare, the ethical treatment of age structures, the degree of endogeneity of longevity, the value of a statistical life (VSL) used in the calibration of preference parameters, and preference parameters themselves (for a given VSL). Pictures of Japan's development are significantly sensitive to those postulates, suggesting that longevity-adjusted income measures should be computed under not one—as is usually done—but several assumption sets, to account for the difficulty of solving the income/longevity weighting problem. Hence, this study casts new light on the trade-offs raised by the aggregation of economic and demographic achievements into a preferences-based composite indicator.
Aggregated output in industrialized countries has become less volatile over the past decades. Whether this “Great Moderation” can be found in firm level data as well remains disputed. We study the evolution of firm level output volatility using a balanced panel dataset on German firms that covers 35 years (1971-2005) and about 1,500 firms per year. In contrast to earlier work using firm level data, we use the multifactor residual model proposed by Pesaran (2006) to isolate the idiosyncratic component of firms’ real sales growth from macroeconomic developments. Our paper has three main findings. First, time trends in unconditional firm level and aggregated output volatility in Germany are similar. There has been a long-run downward trend, which was interrupted by the unification period. Second, the conditional, idiosyncratic firm level volatility does not exhibit a downward trend. If anything idiosyncratic volatility has been on a slow trend rise. Third, we find evidence of a positive link between growth and volatility at the firm level.
This paper studies the design of a nonlinear social security scheme in a society where individuals differ in two respects: productivity and degree of myopia. Myopic individuals may not save "enough" for their retirement because their "myopic self" emerges when labor supply and savings decisions are made. The social welfare function is paternalistic: the rate of time preference of the far-sighted (which corresponds to the "true" preferences of the myopics) is used for both types. We show that the paternalistic solution does not necessarily imply forced savings for the myopics. This is because paternalistic considerations are mitigated or even outweighed by incentive effects. Our numerical results suggest that as the number of myopic individuals increases, there is less redistribution and more forced saving. Furthermore, as the number of myopic increases, the desirability of social security (measured by the difference between social welfare with and without social security) increases.
We evaluate the effects of international outsourcing and labor taxation on wage formation and equilibrium unemployment in dual labor markets. Outsourcing promotes wage dispersion between the high-skilled and low-skilled workers. Higher domestic low-skilled wage tax, higher payroll tax and lower wage tax exemption increase optimal outsourcing. Outsourcing will reduce equilibrium unemployment of low-skilled workers both in the presence and absence of labor taxation. In the presence of outsourcing, wage tax, tax exemption and payroll tax have an ambiguous effect on equilibrium unemployment. Increasing the degree of tax progression decreases the wage rate and increases the demand of low-skilled workers.
This paper shows that the combination of habit formation - present consumption creating additional consumption needs in the future - and myopia may explain why some retirees are forced to 'unretire', i.e., unexpectedly return to work. It also shows that when myopia about habit formation leads to unretirement there is a case for government's intervention. In a first-best setting the optimal solution can be 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. We study the design of consumption taxes in such a setting when myopic individuals differ in productivity.
This paper analyzes the pattern of consumption taxes in a two period model with habit formation and myopia. An individual’s 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.
This paper studies the determination through majority voting of a pension scheme when society consists of far-sighted and myopic individuals. All individuals have the same basic preferences but myopics tend to adopt a short-term view (instant gratification) when dealing with retirement saving and labor supply. Consequently, they will find themselves with low consumption after retirement and regret their insufficient savings decisions. Henceforth, when voting they tend to commit themselves into forced saving. We consider a pension scheme that is characterized by two parameters: the payroll tax rate (that determines the size or generosity of the system) and the “Bismarckian factor” that determines its redistributiveness. Individuals vote sequentially. We examine how the introduction of myopic agents affects the generosity and the redistributiveness of the pension system. Our main result is that a flat pension system is always chosen when all individuals are of one kind (all far-sighted or all myopic), while a less redistributive system may be chosen if society is composed of both myopic and far-sighted agents. Furthermore, while myopic individuals tend to prefer larger payroll taxes than their far-sighted counterparts, the generosity of the system does not always increase with the proportion of myopics.
Regulation by the state can take a variety of forms. Some regulations are aimed entirely at redistribution, such as when we tax the rich and give to the poor. Other regulations seek to counteract externalities by restricting behavior in a way that imposes harm on an individual basis but yields net societal benefits. A good example is taxation to fund public goods such as roads. In such situations, an individual would be better off if she alone were exempt from the tax; she benefits when everyone (including herself) must pay the tax.
This paper develops a dynamic model with endogenous labor supply, savings and health capital, where the consumers differ in ability as well as suffer from a self-control problem generated by quasi-hyperbolic discounting. The purpose is to analyze how a paternalistic government, which implements a time-consistent mix of labor income taxation, capital income taxation and commodity taxation, ought to use this tax system for purposes of redistribution and correction when individual ability is private information. Among the results, we show how the (nonlinear) income taxes ought to be used as indirect instruments for influencing the commodity demand behavior at the individual level: the intuition is that linear commodity taxes are not flexible enough to achieve proper incentives for investments in health capital.
I use a unique dataset to estimate the relationship between time preferences, social capital, and the decision to start and quit smoking. I find impatient respondents do not differ much from patient ones, but quasi-hyperbolic respondents tend to smoke more often and have much more difficulties quitting. I also find that trust in the community protects from starting and helps quitting, but sense of control encourages starting smoking. These preliminary results strongly suggest that smokers form a heterogeneous population: I argue that such heterogeneity means that taxes on cigarettes are a blunt and inefficient instrument of public health.
Hyperbolic discount functions induce dynamically inconsistent preferences, implying a motive for consumers to constrain their
own future choices. This paper analyzes the decisions of a hyperbolic consumer who has access to an imperfect commitment technology:
an illiquid asset whose sale must be initiated one period before the sale proceeds are received. The model predicts that consumption
tracks income, and the model explains why consumers have asset-specific marginal propensities to consume. The model suggests
that financial innovation may have caused the ongoing decline in U. S. savings rates, since financial innovation increases
liquidity, eliminating commitment opportunities. Finally, the model implies that financial market innovation may reduce welfare
by providing “too much” liquidity.
This paper studies the design of a nonlinear social security scheme in a society where individuals differ in two respects: productivity and degree of myopia. Myopic individuals may not save "enough" for their retirement because their "myopic self" emerges when labor supply and savings decisions are made. The social welfare function is paternalistic: the rate of time preference of the far-sighted (which corresponds to the "true" preferences of the myopics) is used for both types. We show that the paternalistic solution does not necessarily imply forced savings for the myopics. This is because paternalistic considerations are mitigated or even outweighed by incentive effects. Our numerical results suggest that as the number of myopic individuals increases, there is less redistribution and more forced saving. Furthermore, as the number of myopic increases, the desirability of social security (measured by the difference between social welfare with and without social security) increases.
We analyse the determination of taxes on harmful goods when consumers have self-control problems. We show that under mild conditions, the socially optimal tax rate exceeds the average distortion caused by self-control problems. Further, we show that in most cases the tax rate chosen in political equilibrium is below the socially optimal level.
Regulation by the state can take a variety of forms. Some regulations are aimed entirely at redistribution, such as when we tax the rich and give to the poor. Other regulations seek to counteract externalities by restricting behavior in a way that imposes harm on an individual basis but yields net societal benefits. A good example is taxation to fund public goods such as roads. In such situations, an individual would be better off if she alone were exempt from the tax; she benefits when everyone (including herself) must pay the tax.
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.
This paper concerns the policy implications of a potential self-control problem underlying the consumption of unhealthy food. Our results show that subsidies on wealth and health capital can be used to implement a socially optimal resource allocation.
Paternalism, merit goods and specific egalitarianism are concepts we sometimes meet in the literature. The thing in common is that the policy maker does not fully respect the consumer sovereignty principle and designs policies according to some other criterion than individuals' preferences. Using the self-selection approach to tax problems developed by Stiglitz [Stiglitz, J.E., 1982. Self-selection and Pareto-efficient taxation. Journal of Public Economics 17, 213–240] and Stern [Stern, N.H., 1982. Optimum taxation with errors in administration. Journal of Public Economics 17, 181–211], the paper provides a characterization of the properties of an optimal redistributive mixed tax scheme in the general case when the government evaluates individuals' well-being using a different utility function than the one maximized by private agents.
We investigate “sin taxes” on unhealthy items, such as fatty foods, that people may (by their own reckoning) consume too much of. We employ a standard optimal-taxation framework, but replace the standard assumption that all consumers have 100% self control with an assumption that some consumers may have some degree of self-control problems. We show that imposing taxes on unhealthy items and returning the proceeds to consumers can generally improve total social surplus. Because such taxes counteract over-consumption by consumers with self-control problems while at the same time they naturally redistribute income to consumers with no self-control problems (who consume less), such taxes can even create Pareto improvements. Finally, we demonstrate with some simple numerical examples that even if the population exhibits relatively few self-control problems, optimal taxes can still be large.
One of the most cogent criticisms of excise taxes is their regressivity, with lower income groups spending a much larger share of their income on goods such as cigarettes than do higher income groups. We argue that traditional quantity-based measures of incidence are only appropriate under a very restrictive “time-consistent” model of consumption of sin goods. A model that is much more consistent with existing evidence on smoking decisions is a time-inconsistent formulation where excise taxes on cigarettes serve a self-control function that is valued by smokers who would like to quit but cannot. This self-control function benefits lower income groups more, since they have a significantly higher price sensitivity of smoking. Calibrations show that, as a result, cigarette taxes are much less regressive than previously assumed, and are even progressive for a wide variety of parameter values.
In this paper we examine a way of representing merit goods by allowing governments to apply a specific form of correction to consumers' preferences. The model builds upon an approach to the analysis of taste and quality change due to Fisher and Shell. We look at the first-best allocation of resources where this is done. We also consider second-best policies in which the government must charge the same price to all consumers of the merit good, and when optimal lump-sum transfers are not available.
This paper makes two contributions to the modeling of addiction. First, we provide new and convincing evidence that smokers
are forward-looking in their smoking decisions, using state excise tax increases that have been legislatively enacted but
are not yet effective, and monthly data on consumption. Second, we recognize the strong evidence that preferences with respect
to smoking are time inconsistent, with individuals both not recognizing the true difficulty of quitting and searching for
self-control devices to help them quit. We develop a new model of addictive behavior that takes as its starting point the
standard “rational addiction” model, but incorporates time-inconsistent preferences. This model also exhibits forward-looking
behavior, but it has strikingly different normative implications; in this case optimal government policy should depend not
only on the externalities that smokers impose on others but also on the “internalities” imposed by smokers on themselves.
We estimate that the optimal tax per pack of cigarettes should he at least one dollar higher under our formulation than in
the rational addiction case.
One of the most striking facts about obesity is the powerful inverse relation between obesity and socioeconomic status in the developed world, especially among women1. What is responsible for this association? There are at least three possibilities: obesity influences socioeconomic status, socioeconomic status influences obesity, or a common factor or factors influence both obesity and socioeconomic status. There is evidence to support each of these possibilities, and limits to the evidence for each. Strong new evidence for the influence of obesity on socioeconomic status is reported by Gortmaker et al. in this issue of the Journal2. Their study . . .
I use a unique dataset to estimate the relationship between time preferences, social capital, and the decision to start and quit smoking. I find impatient respondents do not differ much from patient ones, but quasi-hyperbolic respondents tend to smoke more often and have much more difficulties quitting. I also find that trust in the community protects from starting and helps quitting, but sense of control encourages starting smoking. These preliminary results strongly suggest that smokers form a heterogeneous population: I argue that such heterogeneity means that taxes on cigarettes are a blunt and inefficient instrument of public health.
The classical economic approach to policy analysis assumes that people always respond optimally to the costs and benefits of their available choices. A great deal of evidence suggests, however, that in some contexts people make errors that lead them not to behave in their own best interests. Economic policy prescriptions might change once we recognize that humans are humanly rational rather than superhumanly rational, and in particular it may be fruitful for economists to study the possible advantages of paternalistic policies that help people make better choices. We propose an approach for studying optimal paternalism that follows naturally from standard assumptions and methods of economic theory: Write down assumptions about the distribution of rational and irrational types of agents, about the available policy instruments, and about the government’s information about agents, and then investigate which policies achieve the most efficient outcomes. In other words, economists ought to treat the analysis of optimal paternalism as a mechanism-design problem when some agents might be boundedly rational. This approach has many advantages. First and foremost, by explicitly addressing when and how people do and don’t pursue their own best interests, economists will be better able to contribute to policy debates. To contribute to debates over regulating private financial decisions, we must study
Investing for retirement is one of the most important tasks of a person's life, and yet many people do a very poor job. This paper argues that a plausibly important source of poor performance is procrastination. We present a simple model and calibration exercises showing how a person who naively procrastinates due to a time-inconsistent taste for immediate gratification may put off investigating, or implementing, superior investment strategies. Even when the person knows that the benefits of finding a superior investment enormously outweigh the short-term effort costs, she may significantly procrastinate because she repeatedly plans to put in the effort soon. We conclude by discussing some policies that might be used to influence the savings behavior of procrastinators, with an emphasis on policies aimed at default options and short-term incentives that do not significantly alter long-term incentives. Acknowledgments: We thank Peter Diamond and other participants in the Russe...
C ?The editors of The Scandinavian Journal of Economics 2011. rTaxing sin goods and subsidizing health care 123 Cremer Voting over the Size and Type of Social Security When Some Individuals are Myopic
- H De
- Ph Donder
- D Maldonado
- P Pestieau
C ?The editors of The Scandinavian Journal of Economics 2011. rTaxing sin goods and subsidizing health care 123 Cremer, H., De Donder, Ph., Maldonado, D., and Pestieau, P. (2007), Voting over the Size and Type of Social Security When Some Individuals are Myopic, Journal of Public Economics 91, 2041–2061
The Non-Universal Experience of Regret Among Smokers in Four Countries
- Fong
Communicable Diseases, Lifestyles and Personal Responsibility
- J Harris
Behavioral Dimensions of Retirement Economics
- T. O'Donoghue
- M. Rabin
Behavioral Economics, Public Policy, and Paternalism
- Thaler
- A J Stunkard
- T Sorensen
Stunkard, A. J. and Sorensen, T. (1993), Obesity and Socioeconomic Status, New England
Journal of Medicine 329, 1036–1037.
- O 'donoghue
- T Rabin
O'Donoghue, T. and Rabin, M. (2006), Optimal Sin Taxes, Journal of Public Economics 90,
1825–1849.
Communicable Diseases Lifestyles and Personal Responsibility Ethics and Rights unpublished
- J Harris