Internality-Correcting Consumption Taxes and Voluntary Public Assistance Programs
49 Pages Posted: 15 Aug 2016 Last revised: 15 May 2017
Date Written: March 19, 2017
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: Suggested Citation