Optimal Indirect Taxation when Consumers Have Preferences for Immediate Gratification

This paper studies an optimal taxation problem under the assumption that consumers have time-inconsistent preferences for immediate gratification. Because of that, consumers consciously overconsume one good, and regret later for the lack of self-control that has generated excessive consumption. The paper shows that, when agents are privately informed on their degree of rationality, the uniform commodity taxation theorem of Atkinson and Stiglitz (1976) does not hold, and goods that generate immediate gratification should be taxed differently from other goods. These results are not driven by the planner’s paternalism, but only by incentive considerations.