Tax and subsidy incidence equivalence theories: Experimental evidence from competitive markets

Bradley J. Ruffle

Research output: Contribution to journalArticlepeer-review

23 Scopus citations

Abstract

A basic tenet in microeconomics is tax incidence equivalence, which holds that the burden of a unit tax on buyers and sellers is independent of who actually pays the tax. By contrast, policymakers and the public often mistake statutory incidence for economic incidence. Using competitive laboratory markets, I test both tax incidence equivalence and an analogous theorem for subsidies. For sufficiently large markets, the results show strong support for both theories; there is little to no evidence, even in the short run, of the popular misperception that statutory incidence equals economic incidence. In smaller markets in which competitive forces are weaker and relative bargaining strengths may play a role, the evidence for tax incidence equivalence is weaker as minor price discrepancies may persist between markets.

Original languageEnglish
Pages (from-to)1519-1542
Number of pages24
JournalJournal of Public Economics
Volume89
Issue number8 SPEC. ISS.
DOIs
StatePublished - 1 Jan 2005

Keywords

  • Competitive markets
  • Experimental economics
  • Framing effects
  • Subsidy
  • Tax incidence equivalence

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