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Input Versus Output Taxation in an Experimental International Economy

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Author Info
Arno Riedl ()
Frans van Winden ()

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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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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 1088.

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

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

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Find related papers by JEL classification:
A10 - General Economics and Teaching - - General Economics - - - General
C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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