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Grosswage illusion in a real effort experiment

  • Martin Fochmann

    ()

    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Joachim Weimann

    ()

    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Kay Blaufus

    ()

    (Free University of Frankfurt (Oder))

  • Jochen Hundsdoerfer

    ()

    (Free University Berlin)

  • Dirk Kiesewetter

    ()

    (Faculty of Economics and Management, JUlius-Maximilians University Würzburg)

Registered author(s):

    In a controlled laboratory experiment, subjects had to fold letters in order to earn money. While the net income per letter was the same in the three treatments, the gross income varied and the tax rate was 0, 25% and 50%. Although work incentives should be the same in all treatments, subjects worked harder and longer when they were taxed. We conclude that this is due to a ‘gross-wage illusion effect’. The existence of this effect demonstrates that not only the tax rate and the tax base are of importance for work incentives, but also the perception of a tax.

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    File URL: http://www.ww.uni-magdeburg.de/fwwdeka/femm/a2010_Dateien/2010_09.pdf
    File Function: First version, 2010
    Download Restriction: no

    Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 100009.

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    Length: 14 pages
    Date of creation: Feb 2010
    Date of revision:
    Handle: RePEc:mag:wpaper:100009
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    1. Phelps, Edmund S, 1973. "Taxation of Wage Income for Economic Justice," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 331-54, August.
    2. de Bartolome, Charles A.M., 1991. "Which Tax Rate Do People Use: Average or Marginal?," Working Papers 91-49, C.V. Starr Center for Applied Economics, New York University.
    3. Looney, Adam & Kroft, Kory & Chetty, Raj, 2009. "Salience and Taxation: Theory and Evidence," Scholarly Articles 9748525, Harvard University Department of Economics.
    4. Congdon, William J. & Kling, Jeffrey R. & Mullainathan, Sendhil, 2009. "Behavioral Economics and Tax Policy," National Tax Journal, National Tax Association, vol. 62(3), pages 375-86, September.
    5. Swenson, Charles W., 1988. "Taxpayer behavior in response to taxation: An experimental analysis," Journal of Accounting and Public Policy, Elsevier, vol. 7(1), pages 1-28.
    6. Arrazola, Maria & de Hevia, Jose & Sanz, Jose F., 2000. "More on tax perception and labour supply: the Spanish case," Economics Letters, Elsevier, vol. 67(1), pages 15-21, April.
    7. Fujii, Edwin T & Hawley, Clifford B, 1988. "On the Accuracy of Tax Perceptions," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 344-47, May.
    8. Konig, Heinz, et al, 1995. "Tax Illusion and Labour Supply of Married Women: Evidence from German Data," Kyklos, Wiley Blackwell, vol. 48(3), pages 347-68.
    9. Sadka, Efraim, 1976. "On Income Distribution, Incentive Effects and Optimal Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 261-67, June.
    10. Sutter, Matthias & Weck-Hannemann, Hannelore, 2003. " Taxation and the Veil of Ignorance--A Real Effort Experiment on the Laffer Curve," Public Choice, Springer, vol. 115(1-2), pages 217-40, April.
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