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Equilibrium Tax Rates and Income Redistribution: A Laboratory Study

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  • Marina Agranov
  • Thomas R. Palfrey

Abstract

This paper reports results from a laboratory experiment that investigates the Meltzer-Richard model of equilibrium tax rates, inequality, and income redistribution. We also extend that model to incorporate social preferences in the form of altruism and inequality aversion. The experiment varies the amount of inequality and the collective choice procedure to determine tax rates. We report four main findings. First, higher wage inequality leads to higher tax rates. The effect is significant and large in magnitude. Second, the average implemented tax rates are almost exactly equal to the theoretical ideal tax rate of the median wage worker. Third, we do not observe any significant differences in labor supply or average implemented tax rates between a direct democracy institution and a representative democracy system where tax rates are determined by candidate competition. Fourth, we observe negligible deviations from labor supply behavior or voting behavior in the directions implied by altruism or inequality aversion.

Suggested Citation

  • Marina Agranov & Thomas R. Palfrey, 2014. "Equilibrium Tax Rates and Income Redistribution: A Laboratory Study," NBER Working Papers 19918, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19918
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    Cited by:

    1. repec:kap:expeco:v:20:y:2017:i:4:d:10.1007_s10683-017-9516-5 is not listed on IDEAS
    2. Oskar Nupia, 2017. "Income Taxes, Political Accountability and Public Goods Provision," Documentos CEDE 015835, Universidad de los Andes - CEDE.
    3. Sausgruber, Rupert & Sonntag, Axel & Tyran, Jean-Robert, 2019. "Disincentives from Redistribution: Evidence on a Dividend of Democracy," CEPR Discussion Papers 13773, C.E.P.R. Discussion Papers.
    4. repec:kap:expeco:v:20:y:2017:i:2:d:10.1007_s10683-016-9490-3 is not listed on IDEAS
    5. Friedrichsen, Jana & König, Tobias & Schmacker, Renke, 2018. "Social image concerns and welfare take-up," Journal of Public Economics, Elsevier, vol. 168(C), pages 174-192.
    6. Dal Bó, Ernesto & Dal Bó, Pedro & Eyster, Erik, 2018. "The demand for bad policy when voters underappreciate equilibrium effects," LSE Research Online Documents on Economics 74455, London School of Economics and Political Science, LSE Library.
    7. Friedrichsen, Jana & König, Tobias & Schmacker, Renke, 2016. "Welfare stigma in the lab: Evidence of social signaling," Discussion Papers, Research Unit: Market Behavior SP II 2016-208, WZB Berlin Social Science Center.
    8. Dmitry Ryvkin & Anastasia Semykina, 2015. "The chicken or the egg: An experimental study of democracy survival, income, and inequality," Working Papers wp2015_11_01, Department of Economics, Florida State University.
    9. Ranehill, Eva & Weber, Roberto A., 2017. "Do Gender Preference Gaps Impact Policy Outcomes?," Working Papers in Economics 713, University of Gothenburg, Department of Economics.
    10. repec:eee:poleco:v:52:y:2018:i:c:p:1-17 is not listed on IDEAS
    11. Huber, Juergen & Shubik, Martin & Sunder, Shyam, 2018. "Financing of public goods through taxation in a general equilibrium economy: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 148(C), pages 171-188.
    12. Lea Cassar & Arnd H. Klein, 2017. "A Matter of Perspective: How Experience Shapes Preferences for Redistribution," CESifo Working Paper Series 6302, CESifo Group Munich.
    13. Islam, Md. Rabiul & Madsen, Jakob B. & Doucouliagos, Hristos, 2018. "Does inequality constrain the power to tax? Evidence from the OECD," European Journal of Political Economy, Elsevier, vol. 52(C), pages 1-17.
    14. repec:eee:poleco:v:55:y:2018:i:c:p:169-184 is not listed on IDEAS
    15. Lefgren, Lars J. & Sims, David P. & Stoddard, Olga B., 2016. "Effort, luck, and voting for redistribution," Journal of Public Economics, Elsevier, vol. 143(C), pages 89-97.
    16. Masaki Aoyagi & Naoko Nishimura & Yoshitaka Okano, 2017. "Efficiency and Voluntary Redistribution under Inequality," ISER Discussion Paper 0992, Institute of Social and Economic Research, Osaka University.
    17. Natalia Jimenez & Elena Molis-Bañales & Angel Solano-Garcia, 2018. "The Effect of Initial Inequality on Meritocracy: a Voting Experiment on Tax Redistribution," Working Papers 18.13, Universidad Pablo de Olavide, Department of Economics.
    18. repec:eee:poleco:v:56:y:2019:i:c:p:27-38 is not listed on IDEAS
    19. Natalia Jiménez Jiménez & Elena Molis & Ángel Solano García, "undated". "The Effect of Initial Inequality on Meritocracy. A Voting Experiment on Tax Redistribution," ThE Papers 18/01, Department of Economic Theory and Economic History of the University of Granada..

    More about this item

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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