Published
Annual Symposium on Management and Social Sciences conference proceedings
optimal taxation in life-cycle economies in the presence of commitment and temptation problems
Abstract
Self%23 control problem is an important determinant of individualsleconomic decisions. The decision makerls future utility is affected by unwanted temptation. This implies that implications of various government policies would differ if one incorporates these behavioral aspects. Public finance instruments could, however, be used to correct anomalies created by temptation. The purpose of this paper is to examine the question of optimal taxation when individuals have self%23 control problems. In order to capture our agentsltemptation towards current consumption, our model make use of the preference structure pioneered by Gul and Pesendorfer and further elaborated by Krusell et al. in the context of optimal taxation. We extend by adding labor choice and besides savings tax, we also analyze capital income tax, consumption tax and labor income tax. Results show that when the analysis is restric%23 ted to logarithmic preferences separable in consumption and labor supply, the government should subsidize either capital income or investment as it maximizes both an individualls commitment utility for consumption and labor supply at the same time. Because individu%23 als consume and supply labor more than their commitment utility, subsidizing improves welfare as it makes temptation less attractive. JEL Classification: