Earmarking and the Political Support of Fat Taxes

28 Pages Posted: 16 Sep 2015

See all articles by Helmuth Cremer

Helmuth Cremer

University of Toulouse (GREMAQ & IDEI); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Catarina Goulão

University of Toulouse 1 - Toulouse School of Economics (TSE)

Kerstin Roeder

Ludwig Maximilian University of Munich (LMU); University of Augsburg

Multiple version iconThere are 2 versions of this paper

Date Written: September 2015

Abstract

A fat and a healthy good provide immediate gratification, and cause health costs or benefits in the long run, which are misperceived. Additionally, the fat good (healthy good) increases (decreases) health care costs by increasing (decreasing) the probability of suffering from a chronic disease in the future. Individuals differ in income and in their degree of misperceptions concerning the health effects of the consumption of fat and of healthy goods. The level of the fat tax is determined through majority voting. Individuals vote according to their misperceived utility function. Consequently, excessive fat consumption is not due to a self-control problem but due to information deficiencies or cognitive inability to process information. A fraction of the fat tax proceeds is “earmarked” to reduce health insurance premiums while the remaining fraction finances a subsidy on the healthy good. This earmarking rule is determined at a constitutional stage to maximize utilitarian or Rawlsian welfare, anticipating the induced political equilibrium. We show that the fat tax in the political equilibrium is always lower than the utilitarian fat tax. This is no longer necessarily true with a Rawlsian objective. The determination of the optimal earmarking rule is quite complex. Even in the utilitarian case, it is not just used to boost political support for the fat tax. Instead, it may involve a tradeoff between the fat tax and the healthy good subsidy.

Keywords: earmarking, fat tax, misperception, obesity, voting

JEL Classification: D72, I12, I18

Suggested Citation

Cremer, Helmuth and Goulão, Catarina and Roeder, Kerstin, Earmarking and the Political Support of Fat Taxes (September 2015). CEPR Discussion Paper No. DP10822, Available at SSRN: https://ssrn.com/abstract=2661551

Helmuth Cremer (Contact Author)

University of Toulouse (GREMAQ & IDEI) ( email )

Toulouse, 31000
France
+33 1 6112 8606 (Phone)
+33 1 6112 8637 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Catarina Goulão

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Kerstin Roeder

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

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