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Input Versus Output Taxation in an Experimental International Economy

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  • Arno Riedl
  • Frans van Winden

Abstract

This paper is concerned with 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 as a means to finance unemployment benefits: a sales-tax-cum-labor-subsidy system versus a wage tax system. The two systems are applied to the home country, while the wage tax system always obtains in the foreign country. In stark contrast with expectations of experts the sales tax system clearly outperforms the wage tax system, using standard economic indicators. It is argued that producers' reluctance to incur costs up-front while being uncertain about product prices can explain this outcome. Several pieces of evidence are provided to support this claim. The results strongly suggest that behavioral aspects have to be taken into account also in applied macroeconomic models.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1088.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_1088

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Keywords: laboratory experiment; wage tax; sales tax; macroeconomic policy; behavioral economics;

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Cited by:
  1. Roberto Ricciuti, 2003. "Bringing Macroeconomics into the Lab," Royal Holloway, University of London: Discussion Papers in Economics, Department of Economics, Royal Holloway University of London 03/9, Department of Economics, Royal Holloway University of London, revised Dec 2003.
  2. Casoria Fortuna & Riedl Arno, 2012. "Experimental labor markets and policy considerations: Incomplete contracts and macroeconomic aspects," Research Memorandum, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) 058, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  3. Shachat, Jason & Zhang, Zhenxuan, 2012. "The Hayek hypothesis and long run competitive equilibrium: an experimental investigation," MPRA Paper 39579, University Library of Munich, Germany.
  4. Arno Riedl, 2009. "Behavioral and Experimental Economics Can Inform Public Policy: Some Thoughts," CESifo Working Paper Series, CESifo Group Munich 2902, CESifo Group Munich.

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