Suchergebnisse

We study implications of habit formation for optimal taxation. First, we show that taxation problems with habit formation can be analyzed using dynamic programming techniques. Second, we derive optimal labor and savings wedges for habit formation preferences. We show that habit formation counteracts the conventional Mirrleesian distortions and calls for subsidies to labor supply and savings. We demonstrate that the theoretical results are quantitatively important: in a stylized life-cycle model, average labor and savings wedges fall by more than one third compared to time-separable references. Third, we exploit the analogy between habit formation and durable consumption to study the taxation of durable and nondurable commodities.

We consider a government facing a constraint on the total consumption of a specific good with varieties, and formulate an optimal commodity tax problem under a consumption target. We obtain a uniform pricing result (similar to the familiar uniform taxation rule): setting the same consumer price for all varieties constitutes a solution if, and only if, the compensated price elasticities of the varieties with respect to an untaxed good are all equal and non-negative. If, however, this elasticity condition does not hold, the optimal policy is at variance with the well-known inverse elasticity rule and with the Corlett–Hague rule.