TY - JOUR
T1 - Optimal second best taxation of addictive goods in dynamic general equilibrium
T2 - A revenue raising perspective
AU - Bossi, Luca
AU - Gomis-Porqueras, Pedro
AU - Kelly, David L.
N1 - Publisher Copyright:
© 2014 by De Gruyter 2014.
Copyright:
Copyright 2015 Elsevier B.V., All rights reserved.
PY - 2014/1/1
Y1 - 2014/1/1
N2 - In this paper we derive conditions under which optimal tax rates for addictive goods exceed tax rates for non-addictive consumption goods within a rational addiction framework where exogenous government spending cannot be financed with lump sum taxes. We reexamine classic results on optimal commodity taxation and find a rich set of new findings. Two dynamic effects exist. First, households anticipating higher future addictive tax rates reduce current addictive consumption, so they will be less addicted when the tax rate increases. Therefore, addictive tax revenue falls prior to the tax increase. Surprisingly, the optimal tax rate on addictive goods is generally decreasing in the strength of tolerance, since strong tolerance strengthens this tax anticipation effect. Second, high current tax rates on addictive goods make households less addicted in the future, affecting all future tax revenues in a way which depends on how elasticities are changing over time. Classic results on uniform commodity taxation emerge as special cases when elasticities are constant and the addiction function is homogeneous of degree one. Finally, we also study features of addictive goods such as complementarity to leisure that, while not directly related to the definition of addiction, are nonetheless properties many addictive goods display.
AB - In this paper we derive conditions under which optimal tax rates for addictive goods exceed tax rates for non-addictive consumption goods within a rational addiction framework where exogenous government spending cannot be financed with lump sum taxes. We reexamine classic results on optimal commodity taxation and find a rich set of new findings. Two dynamic effects exist. First, households anticipating higher future addictive tax rates reduce current addictive consumption, so they will be less addicted when the tax rate increases. Therefore, addictive tax revenue falls prior to the tax increase. Surprisingly, the optimal tax rate on addictive goods is generally decreasing in the strength of tolerance, since strong tolerance strengthens this tax anticipation effect. Second, high current tax rates on addictive goods make households less addicted in the future, affecting all future tax revenues in a way which depends on how elasticities are changing over time. Classic results on uniform commodity taxation emerge as special cases when elasticities are constant and the addiction function is homogeneous of degree one. Finally, we also study features of addictive goods such as complementarity to leisure that, while not directly related to the definition of addiction, are nonetheless properties many addictive goods display.
KW - Ramsey model
KW - addictive goods
KW - dynamic optimal taxation
KW - habit formation
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U2 - 10.1515/bejm-2013-0099
DO - 10.1515/bejm-2013-0099
M3 - Review article
AN - SCOPUS:84907603896
VL - 14
SP - 75
EP - 118
JO - B.E. Journal of Macroeconomics
JF - B.E. Journal of Macroeconomics
SN - 1935-1690
IS - 1
ER -