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Are Income and Consumption Taxes Ever Really Equivalent? Evidence from a Real-Effort Experiment with Real Goods

Author

Listed:
  • Tomer Blumkin

    (Department of Economics Ben-Gurion University, Israel)

  • Bradley J. Ruffle

    (Department of Economics, Ben Gurion University, Israel)

  • Yosef Ganun

    (Department of Economics, Ben Gurion University, Israel)

Abstract

The public finance literature demonstrates the equivalence between consumption and labor income (wage) taxes. We construct an environment in which individuals make real labor-leisure choices and spend their earned income on real goods. We use this experimental framework to test whether a labor income tax and an equivalent consumption tax lead to an identical labor-leisure allocation. Despite controlling for subjects’ work ability and inherent labor-leisure preferences and not allowing for saving, subjects reduce their labor supply significantly more in response to an income tax than they do in response to an equivalent consumption tax. We discuss the economic implications of a policy shift from an income to a consumption tax.

Suggested Citation

  • Tomer Blumkin & Bradley J. Ruffle & Yosef Ganun, 2008. "Are Income and Consumption Taxes Ever Really Equivalent? Evidence from a Real-Effort Experiment with Real Goods," Working Papers 0801, Ben-Gurion University of the Negev, Department of Economics.
    • Handle: RePEc:bgu:wpaper:0801
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    References listed on IDEAS

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    More about this item

    Keywords

    experimental economics; tax equivalence; income tax; consumption tax; behavioraleconomics.;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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