The political economy of sin taxes

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 probl...

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Bibliographic Details
Published in:European economic review 2011-05, Vol.55 (4), p.575-594
Main Authors: Haavio, Markus, Kotakorpi, Kaisa
Format: Article
Language:English
Subjects:
Consumer behaviour
Consumption
Consumption taxes
Equilibrium
Excise taxation
Excise taxation Voting Self-control
Excise taxes
Optimal taxation
Political economy
Redistributive taxation
Self control
Self-management
Sin
Studies
Taxes
Voting
Voting behaviour
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Summary: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.
ISSN:0014-2921
1873-572X
DOI:10.1016/j.euroecorev.2010.06.002