IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

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

  • Blumkin, Tomer
  • Ruffle, Bradley J.
  • Ganun, Yosef

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
File Function: original version
Download Restriction: no

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 6479.

in new window

Date of creation: 28 Dec 2007
Date of revision:
Handle: RePEc:pra:mprapa:6479
Contact details of provider: Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Markus K Brunnermeier & Christian Julliard, 2006. "Money Illusion and Housing Frenzies," FMG Discussion Papers dp579, Financial Markets Group.
  2. Saez, Emmanuel, 2002. "The desirability of commodity taxation under non-linear income taxation and heterogeneous tastes," Journal of Public Economics, Elsevier, vol. 83(2), pages 217-230, February.
  3. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
  4. Amy Finkelstein, 2009. "E-ztax: Tax Salience and Tax Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 124(3), pages 969-1010.
  5. Ernst Fehr & Lorenz Goette, 2002. "Do workers work more if wages are high? Evidence from a randomized field experiment," Natural Field Experiments 00240, The Field Experiments Website.
  6. Ernst Fehr & Jean-Robert Tyran, 2004. "Money Illusion and Coordination Failure," CESifo Working Paper Series 1141, CESifo Group Munich.
  7. repec:tpr:qjecon:v:112:y:1997:i:2:p:443-77 is not listed on IDEAS
  8. Diamond, P., 1994. "Optimal Income Taxation: An Exemple with a U-Shaped Pattern of Optimal Marginal Tax Rates," Working papers 94-14, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Ernst Fehr & Jean-Robert Tyran, 2000. "Does Money Illusion Matter?," IEW - Working Papers 045, Institute for Empirical Research in Economics - University of Zurich.
  10. Kaplow, Louis, 2006. "On the undesirability of commodity taxation even when income taxation is not optimal," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1235-1250, August.
  11. Raj Chetty & Adam Looney & Kory Kroft, 2007. "Salience and Taxation: Theory and Evidence," NBER Working Papers 13330, National Bureau of Economic Research, Inc.
  12. O'Donoghue, Ted & Rabin, Matthew, 1997. "Doing It Now or Later," Department of Economics, Working Paper Series qt7t44m5b0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  13. Rudolf Kerschbamer & Georg Kirchsteiger, 2000. "Theoretically robust but empirically invalid? An experimental investigation into tax equivalence," Economic Theory, Springer, vol. 16(3), pages 719-734.
  14. Salanié, Bernard, 2011. "The Economics of Taxation," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262016346, June.
  15. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
  16. Rupert Sausgruber & Jean-Robert Tyran, . "Testing the Mill hypothesis of fiscal illusion," Discussion Papers 04-18, University of Copenhagen. Department of Economics, revised Sep 2004.
  17. Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2005. "Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 639-668.
  18. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  19. repec:tpr:qjecon:v:120:y:2005:i:2:p:639-668 is not listed on IDEAS
  20. repec:oup:qjecon:v:112:y:1997:i:2:p:443-77 is not listed on IDEAS
  21. Ruffle, Bradley J., 2005. "Tax and subsidy incidence equivalence theories: experimental evidence from competitive markets," Journal of Public Economics, Elsevier, vol. 89(8), pages 1519-1542, August.
  22. Jean-Robert Tyran & Arno Riedl, 2003. "Tax Liability Side Equivalence in Gift-Exchange Labor Markets," University of St. Gallen Department of Economics working paper series 2003 2003-15, Department of Economics, University of St. Gallen.
  23. Naomi E. Feldman & Peter Katuscak, 2006. "Should the Average Tax Rate Be Marginalized?," CERGE-EI Working Papers wp304, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  24. Eldar Shafir & Peter Diamond & Amos Tversky, 1997. "Money Illusion," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 341-374.
  25. Borck, Rainald & Engelmann, Dirk & Müller, Wieland & Normann, Hans-Theo, 2000. "Tax liability side equivalence in experimental posted-offer markets," SFB 373 Discussion Papers 2000,8, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  26. George-Marios Angeletos, 2001. "The Hyberbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 47-68, Summer.
  27. Kooreman, Peter & Faber, Riemer & Hofmans, Heleen, 2004. "Charity Donations and the Euro Introduction: Some Quasi-Experimental Evidence on Money Illusion," IZA Discussion Papers 1318, Institute for the Study of Labor (IZA).
  28. Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2005. "Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis," NBER Working Papers 11018, National Bureau of Economic Research, Inc.
  29. Sillamaa, M. A., 1999. "Taxpayer behavior in response to taxation: comment and new experimental evidence," Journal of Accounting and Public Policy, Elsevier, vol. 18(2), pages 165-177.
  30. Krishna, Aradhna & Slemrod, Joel, 2003. "Behavioral Public Finance: Tax Design As Price Presentation," International Tax and Public Finance, Springer, vol. 10(2), pages 189-203, March.
  31. Colin Camerer & Linda Babcock & George Loewenstein & Richard Thaler, 1997. "Labor Supply of New York City Cabdrivers: One Day at a Time," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 407-441.
  32. Henry S. Farber, 2005. "Is Tomorrow Another Day? The Labor Supply of New York City Cabdrivers," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 46-82, February.
  33. Deaton, Angus, 1979. "Optimally uniform commodity taxes," Economics Letters, Elsevier, vol. 2(4), pages 357-361.
  34. 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.
  35. Borck, R. & Engelmann, D. & Müller, W. & Normann, H.T., 2002. "Tax liability side equivalence in an experimental posted offer market," Other publications TiSEM bac0e339-660b-4215-99d4-c, Tilburg University, School of Economics and Management.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:6479. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.