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

  • Blumkin, Tomer

    ()

    (Ben Gurion University)

  • Ruffle, Bradley

    ()

    (Ben Gurion University)

  • Ganun, Yosef

    ()

    (Ben Gurion University)

The public finance literature demonstrates the equivalence between consumption and labor-income (wage) taxes. We introduce an experimental paradigm in which individuals make real labor-leisure choices and spend their earned income on real goods. We use this paradigm to test whether a labor-income tax and an equivalent consumption tax lead to identical labor-leisure allocations. Despite controlling for subjects’ work ability and inherent labor-leisure preferences and disallowing saving, subjects reduce their labor supply significantly more in response to an income tax than to an equivalent consumption tax. We discuss the economic implications of a policy shift to a consumption tax.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5145.

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Length: 31 pages
Date of creation: Aug 2010
Date of revision:
Handle: RePEc:iza:izadps:dp5145
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