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Input versus Output Taxation in an Experimental International Economy

  • Riedl, Arno

    ()

    (Maastricht University)

  • van Winden, Frans

    ()

    (University of Amsterdam)

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 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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