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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.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 56 (2012)
Issue (Month): 6 ()
Pages: 1200-1219

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Handle: RePEc:eee:eecrev:v:56:y:2012:i:6:p:1200-1219

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

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Keywords: Experimental economics; Tax equivalence; Income tax; Consumption tax; Behavioral economics;

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