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Tax Policy Design in The Presence of Social Preferences: Some Experimental Evidence

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Abstract

This paper reports the results of experiments designed to examine whether a taste for fairness affects people’s preferred tax structure. Building on the Fehr and Schmidt (1999) model we devise a simple test for the presence of social preferences in voting for alternative tax structures. The experimental results show that individuals demonstrate concern for their own payoff and inequality aversion in choosing between alternative tax structures. However, concern for redistribution decreases when it leads to increasing deadweight losses. Our findings have important implications for the design of optimal tax theory.

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File URL: http://icepp.gsu.edu/sites/default/files/documents/icepp/wp/ispwp0425.pdf
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Bibliographic Info

Paper provided by International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University in its series International Center for Public Policy Working Paper Series, at AYSPS, GSU with number paper0425.

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Length: 34 pages
Date of creation: 01 Nov 2004
Date of revision:
Handle: RePEc:ays:ispwps:paper0425

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Phone: 404-413-0235
Fax: 404-413-0244
Web page: http://aysps.gsu.edu/isp/index.html

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Keywords: tax policy; social preferences; fairness;

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  1. Jorge Martinez-Vazquez & Mark Rider, 1996. "A Revelation Approach To Optimal Taxation," Public Finance Review, , vol. 24(4), pages 439-463, October.
  2. Benjamin E. Hermalin and Alice M. Isen., 1999. "The Effect of Affect on Economic and Strategic Decision Making," Economics Working Papers E99-270, University of California at Berkeley.
  3. repec:att:wimass:9610 is not listed on IDEAS
  4. Andreoni, J. & Erard, B. & Feinstein, J., 1996. "Tax Compliance," Working papers 9610r, Wisconsin Madison - Social Systems.
  5. Carlsson , Fredrik & Gupta, Gautam & Johansson-Stenman, Olof, 2002. "Choosing from Behind a Veil of Ignorance in India," Working Papers in Economics 72, University of Gothenburg, Department of Economics.
  6. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
  7. Hettich, Walter & Winer, Stanley L, 1988. "Economic and Political Foundations of Tax Structure," American Economic Review, American Economic Association, vol. 78(4), pages 701-12, September.
  8. Charness, Gary & Rabin, Matthew, 2001. "Understanding Social Preferences with Simple Tests," Department of Economics, Working Paper Series qt4qz9k8vg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  9. Guth, Werner & Tietz, Reinhard, 1990. "Ultimatum bargaining behavior : A survey and comparison of experimental results," Journal of Economic Psychology, Elsevier, vol. 11(3), pages 417-449, September.
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  11. Olof Johansson-Stenman & Fredrik Carlsson & Dinky Daruvala, 2002. "Measuring Future Grandparents" Preferences for Equality and Relative Standing," Economic Journal, Royal Economic Society, vol. 112(479), pages 362-383, April.
  12. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Roth, Alvin E. & Vesna Prasnikar & Masahiro Okuno-Fujiwara & Shmuel Zamir, 1991. "Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo: An Experimental Study," American Economic Review, American Economic Association, vol. 81(5), pages 1068-95, December.
  14. John C. Harsanyi, 1955. "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility," Journal of Political Economy, University of Chicago Press, vol. 63, pages 309.
  15. Fehr, Ernst & Schmidt, Klaus M., . "A theory of fairness, competition, and cooperation," Chapters in Economics, University of Munich, Department of Economics.
  16. Norman Gemmell & Oliver Morrissey & Abuzer Pinar, 2004. "Tax perceptions and preferences over tax structure in the united kingdom," Economic Journal, Royal Economic Society, vol. 114(493), pages F117-F138, 02.
  17. Colin F. Camerer, 1997. "Progress in Behavioral Game Theory," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 167-188, Fall.
  18. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  19. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-41, September.
  20. McFadden, Daniel L., 1984. "Econometric analysis of qualitative response models," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 24, pages 1395-1457 Elsevier.
  21. Hoffman Elizabeth & McCabe Kevin & Shachat Keith & Smith Vernon, 1994. "Preferences, Property Rights, and Anonymity in Bargaining Games," Games and Economic Behavior, Elsevier, vol. 7(3), pages 346-380, November.
  22. Lucy F. Ackert & Bryan K. Church & Richard Deaves, 2003. "Emotion and financial markets," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 33-41.
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Citations

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Cited by:
  1. Höchtl, Wolfgang & Sausgruber, Rupert & Tyran, Jean-Robert, 2012. "Inequality aversion and voting on redistribution," European Economic Review, Elsevier, vol. 56(7), pages 1406-1421.
  2. Hörisch, Hannah, 2008. "Is the veil of ignorance only a concept about risk? An experiment," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 230, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Jorge Martinez-Vazquez & Mark Rider & Lucy F. Ackert & Ann Gillette, 2005. "Experimental Evidence for Tax Policy Design," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0517, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  4. Heinemann, Friedrich & Kocher, Martin G., 2010. "Tax compliance under tax regime changes," ZEW Discussion Papers 10-020, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Leonardo Becchetti & Giacomo Degli Antoni & Stefania Ottone & Nazaria Solferino, 2011. "Spectators versus stakeholders with or without veil of ignorance: The difference it makes for justice and chosen distribution criteria," Working Papers 204, ECINEQ, Society for the Study of Economic Inequality.
  6. Leonardo Becchetti & Giacomo Degli Antoni & Stefania Ottone & Nazaria Solferino, 2012. "Spectators Versus Stakeholders with/without Information: the Difference it Makes for Justice," CEIS Research Paper 221, Tor Vergata University, CEIS, revised 20 Feb 2012.

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