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

  • 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)

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.

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Paper provided by Ben-Gurion University of the Negev, Department of Economics in its series Working Papers with number 0801.

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Length: 36 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:bgu:wpaper:0801
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