Optimal Taxation in Lifecycle Economies in the Presence of Commitment and Temptation Problems
- 1Research School of Economics, Australian National University, Canberra, ACT 2600, Australia
- 2Graduate School of Development Economics (GSDE), National Institute of Development Administration (NIDA), 148 Serithai Road, Klong-Chan, Bangkapi, Bangkok 10240, Thailand
Abstract
Self-control problems affect consumption, saving, and labor supply, with implications for tax policy. We study optimal taxation with the self-control preferences of Gul and Pesendorfer. Krusell et al. showed that with these preferences, savings should be subsidized; under logarithmic utility, they showed that the subsidy should rise with age. We extend their analysis by adding a labor–leisure choice and comparing investment, capital income, consumption, and labor income taxes. When temptation applies to the consumption–leisure bundle, a single investment or capital income subsidy corrects both the consumption and the leisure margins in partial equilibrium, whereas consumption taxes require a matching labor tax adjustment. Non-separability between consumption and leisure does not change this requirement. With inelastic labor, the same subsidy rates implement the commitment allocation in a two-period general equilibrium model. In a logarithmic T-period partial equilibrium model with elastic labor, the same subsidy formulas and age profile hold under an interior menu condition. In a calibrated example with annual periods, implementing the commitment allocation raises welfare by about 7 percent of consumption in the baseline. The gain varies widely across empirically plausible degrees of present bias.
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BibTeX
@article{kumru2026optimal,
title = {{Optimal Taxation in Lifecycle Economies in the Presence of Commitment and Temptation Problems}},
author = {Cagri Seda Kumru and Saran Sarntisart},
journal = {Mathematics},
year = {2026},
month = oct,
doi = {10.3390/math14203727},
url = {https://www.mdpi.com/2227-7390/14/20/3727},
note = {CC BY 4.0},
}
RIS
TY - JOUR
TI - Optimal Taxation in Lifecycle Economies in the Presence of Commitment and Temptation Problems
AU - Cagri Seda Kumru
AU - Saran Sarntisart
PY - 2026
DA - 2026/10/14
JO - Mathematics
DO - 10.3390/math14203727
UR - https://www.mdpi.com/2227-7390/14/20/3727
AB - Self-control problems affect consumption, saving, and labor supply, with implications for tax policy. We study optimal taxation with the self-control preferences of Gul and Pesendorfer. Krusell et al. showed that with these preferences, savings should be subsidized; under logarithmic utility, they showed that the subsidy should rise with age. We extend their analysis by adding a labor–leisure choice and comparing investment, capital income, consumption, and labor income taxes. When temptation applies to the consumption–leisure bundle, a single investment or capital income subsidy corrects both the consumption and the leisure margins in partial equilibrium, whereas consumption taxes require a matching labor tax adjustment. Non-separability between consumption and leisure does not change this requirement. With inelastic labor, the same subsidy rates implement the commitment allocation in a two-period general equilibrium model. In a logarithmic T-period partial equilibrium model with elastic labor, the same subsidy formulas and age profile hold under an interior menu condition. In a calibrated example with annual periods, implementing the commitment allocation raises welfare by about 7 percent of consumption in the baseline. The gain varies widely across empirically plausible degrees of present bias.
SN - 2227-7390
ER -