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Input versus output taxation in an experimental international economy

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  • Riedl, Arno
  • van Winden, Frans

Abstract

This paper presents the results of a policy oriented macroeconomic experiment involving an ‘international’ economy with a relatively small ‘home’ country and a large ‘foreign’ country. It compares the economic performance of two alternative tax systems: a wage tax system and a sales-tax-cum-labor-subsidy system. The two systems are applied to the small country, while the wage tax system always obtains in the large country. The main result is that the sales tax system outperforms the wage tax system, using standard economic indicators. Moreover, it turns out that under the sales tax system economic activities appear to be moving toward the ‘better’ of two theoretical equilibria. It is argued that producers’ reluctance to incur costs up-front while being uncertain about product prices can explain these results. Several pieces of evidence are provided to support this claim. The results strongly suggest that behavioral aspects should be taken into account also in applied macroeconomic models.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 56 (2012)
Issue (Month): 2 ()
Pages: 216-232

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Handle: RePEc:eee:eecrev:v:56:y:2012:i:2:p:216-232

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Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: Laboratory experiment; Wage tax; Sales tax; Macroeconomic policy; Behavioral economics;

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Cited by:
  1. Shachat, Jason & Zhang, Zhenxuan, 2012. "The Hayek hypothesis and long run competitive equilibrium: an experimental investigation," MPRA Paper 39579, University Library of Munich, Germany.
  2. Casoria, Fortuna & Riedl, Arno, 2012. "Experimental Labor Markets and Policy Considerations: Incomplete Contracts and Macroeconomic Aspects," IZA Discussion Papers 7102, Institute for the Study of Labor (IZA).
  3. Ricciuti, Roberto, 2008. "Bringing macroeconomics into the lab," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 216-237, March.

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