Are income and consumption taxes ever really equivalent? Evidence from a real-effort experiment with real goods

Tomer Blumkin, Bradley J. Ruffle, Yosef Ganun

Research output: Contribution to journalArticlepeer-review

35 Scopus citations

Abstract

The public finance literature demonstrates the equivalence between consumption and labor-income (wage) taxes. We introduce an experimental paradigm in which individuals make real labor-leisure choices and spend their earned income on real goods. We use this paradigm to test whether a labor-income tax and an equivalent consumption tax lead to identical labor-leisure allocations. Despite controlling for subjects' work ability and inherent labor-leisure preferences and disallowing saving, subjects reduce their labor supply significantly more in response to an income tax than to an equivalent consumption tax. We discuss the economic implications of a policy shift to a consumption tax.

Original languageEnglish
Pages (from-to)1200-1219
Number of pages20
JournalEuropean Economic Review
Volume56
Issue number6
DOIs
StatePublished - 1 Aug 2012

Keywords

  • Behavioral economics
  • Consumption tax
  • Experimental economics
  • Income tax
  • Tax equivalence

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