Temptation and the efficient taxation of education and labor

Bethencourt, Carlos and Kunze, Lars (2016): Temptation and the efficient taxation of education and labor.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: temptation, self control, second-best efficient taxation, inverse elasticity rule, education policy
• Subjects: D - Microeconomics > D9 - Intertemporal Choice > D91 - Intertemporal Household Choice ; Life Cycle Models and Saving; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; I - Health, Education, and Welfare > I2 - Education and Research Institutions > I28 - Government Policy; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J24 - Human Capital ; Skills ; Occupational Choice ; Labor Productivity

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