Temptation and the efficient taxation of education and labor

Carlos Bethencourt and Lars Kunze

MPRA Paper from University Library of Munich, Germany

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.

Keywords: temptation; self control; second-best efficient taxation; inverse elasticity rule; education policy (search for similar items in EconPapers)
JEL-codes: D91 H21 I28 J24 (search for similar items in EconPapers)
Date: 2016-11-18
New Economics Papers: this item is included in nep-edu and nep-pbe
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Journal Article: Temptation and the efficient taxation of education and labor (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:75141

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