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

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  • Blumkin, Tomer
  • Ruffle, Bradley J.
  • Ganun, Yosef

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.

Suggested Citation

  • Blumkin, Tomer & Ruffle, Bradley J. & Ganun, Yosef, 2012. "Are income and consumption taxes ever really equivalent? Evidence from a real-effort experiment with real goods," European Economic Review, Elsevier, vol. 56(6), pages 1200-1219.
    • Handle: RePEc:eee:eecrev:v:56:y:2012:i:6:p:1200-1219
    DOI: 10.1016/j.euroecorev.2012.06.001
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    More about this item

    Keywords

    Experimental economics; Tax equivalence; Income tax; Consumption tax; Behavioral economics;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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