Should We Tax Internalities Like Externalities?

Working Paper

Should We Tax Internalities Like Externalities?

November 10, 2015

Abstract

Does the traditional rationale for taxing externalities also apply to internalities? Yes, if the goal is maximizing efficiency. Efficient taxes reflect any harms consumers overlook, whether to others or themselves. Yes with caution, if the goal also includes equity. Internality taxes fall most heavily on consumers who overlook future costs, a group that tends to have lower incomes. No if the goal is improving the well-being of people who consume harmful products. That paternalistic goal generally implies lower taxes than do efficiency or welfare maximization. In fact, the optimal paternalistic tax is often zero.

Research Area: 

Cross-Center Initiative

Cross-Center Initiative: 
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