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Input versus Output Taxation in an Experimental International Economy

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  • Riedl, Arno

    ()
    (Maastricht University)

  • van Winden, Frans

    ()
    (University of Amsterdam)

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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1344.

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Length: 44 pages
Date of creation: Oct 2004
Date of revision:
Publication status: published in: European Economic Review, 2012, 56 (2), 216-232
Handle: RePEc:iza:izadps:dp1344

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

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References

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Citations

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Cited by:
  1. Arno Riedl, 2009. "Behavioral and Experimental Economics Can Inform Public Policy: Some Thoughts," CESifo Working Paper Series 2902, CESifo Group Munich.
  2. Steven Tucker & Charles Noussair & Fortuna Casoria & Arno Riedl, 2013. "Experimental Labor Markets And Policy Considerations: Incomplete Contracts And Macroeconomic Aspects," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 398-420, 07.
  3. Roberto Ricciuti, 2005. "Bringing Macroeconomics into the Lab," Labsi Experimental Economics Laboratory University of Siena 004, University of Siena.
  4. repec:fee:wpaper:1201 is not listed on IDEAS
  5. Shachat, Jason & Zhang, Zhenxuan, 2012. "The Hayek hypothesis and long run competitive equilibrium: an experimental investigation," MPRA Paper 39579, University Library of Munich, Germany.

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