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Tuesday, July 28, 2009

The Political Economy of Sin Taxes

Markus Haavio (University of Helsinki, Department of Economics) & Kaisa Kotakorpi (University of Tampere, Department of Economics) have posted The Political Economy of Sin Taxes on SSRN.  Here is the abstract:

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.

http://taxprof.typepad.com/taxprof_blog/2009/07/the-political-economy.html

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Comments

In my opinion I think that the equilibrium tax should be equivalent to the socially optimal level. It is interesting to see that the socially optimal corrective tax exceeds the average distortion caused by self-control problems. It would also be interesting to see how much more pronounced the redistributive effects of sin taxes are taken into account when consumption is more harmful to the consumers.

Posted by: The Tax Club | Jul 30, 2009 8:43:45 AM