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Internality-Correcting Consumption Taxes and Voluntary Public Assistance Programs

49 Pages Posted: 15 Aug 2016 Last revised: 15 May 2017

Kyle Rozema

University of Chicago - Law School

Date Written: March 19, 2017

Abstract

Recent empirical work finds that smokers respond to cigarette taxes by enrolling in food stamps. This article proposes a model to explain such behavior and asks how an optimal internality-correcting consumption tax should be set in light of such effects. I find that "endogenous enrollment'' into social safety net programs reduces a tax's efficiency and shapes the distribution of its burden. I estimate a calibrated structural model for cigarette taxation and food stamp enrollment and find that these theoretical effects are quantitatively significant. Last, I show that the implications of endogenous enrollment for existing optimal tax formulas turn on the extent to which enrollment decisions are rational.

Keywords: Behavioral Economics, Consumption Taxes, Internalities, Public Assistance Programs, Imperfect Take-up, Optimal Taxation, Coordinated Regulation

JEL Classification: H21, H26, P41, K0, K34, I14, I18

Suggested Citation

Rozema, Kyle, Internality-Correcting Consumption Taxes and Voluntary Public Assistance Programs (March 19, 2017). Northwestern Law & Econ Research Paper No. 16-15. Available at SSRN: https://ssrn.com/abstract=2822950 or http://dx.doi.org/10.2139/ssrn.2822950

Kyle Rozema (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

HOME PAGE: http://www.kylerozema.com

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