 |
This paper explores how taxes on unhealthy commodities impact consumer behaviour. The two sectors employed in the model are the goods sector, which produces consumption commodities, and the health sector, which provides the agent with health. Health produces so-called ‘healthy time' to replace unproductive ‘sick time'. The role of healthy time is twofold: first, it affects the level of utility by enhancing leisure time; second, it allows the agent to have more time available for work. Although unhealthy commodities provide the agent with utility, they also pose detrimental effects to the accumulation of health. The analytical results show that the implementation of taxes on unhealthy commodities does not have direct effects on health in the steady state; however, in a revenue-neutral tax reform with adjustments of taxes on labour income and those on capital income, the implementation of taxes on unhealthy commodities can improve health through the channel of income effect. The simulation results show that the tax reform of replacing taxes on capital income would contribute to better welfare in the long run with improved levels of health and leisure. These findings have important consequences on, for example, how the UK sugar tax reform should be implemented.
