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The effects of income mobility and tax persistence on income redistribution and inequality

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  • Agranov, Marina
  • Palfrey, Thomas R.

Abstract

We conduct a controlled laboratory experiment to explore the effect of income mobility and tax persistence on equilibrium tax rates and inequality. The theoretical framework of the experiment captures the essential elements of the prospect of upward mobility (POUM) hypothesis in a two-period model and characterizes the dynamic equilibrium tax rates. The experiment allows for a clean test of causality between income mobility and redistributive taxes. Outcomes observed in the experiment are mostly consistent with the comparative static predictions of the model. Mobility and stickiness of taxes lead to lower tax rates, but neither is sufficient by itself. When tax rates are persistent, mobility has a significant negative effect on median implemented taxes. An increase in tax persistence decreases tax rates and increases inequality when mobility is present. An increase in mobility decreases inequality but the effect is modest and not statistically significant.

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  • Agranov, Marina & Palfrey, Thomas R., 2020. "The effects of income mobility and tax persistence on income redistribution and inequality," European Economic Review, Elsevier, vol. 123(C).
    • Handle: RePEc:eee:eecrev:v:123:y:2020:i:c:s0014292120300040
    DOI: 10.1016/j.euroecorev.2020.103372
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    References listed on IDEAS

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    Cited by:

    1. Tongzhe Li & Bradley J. Ruffle, 2023. "Voting for income redistribution in a dynamic-income experiment," Department of Economics Working Papers 2023-02, McMaster University.
    2. Jiménez-Jiménez, Natalia & Molis, Elena & Solano-García, Ángel, 2023. "Don't shoot yourself in the foot! A (real-effort task) experiment on income redistribution and voting," European Journal of Political Economy, Elsevier, vol. 78(C).
    3. Forteza, Alvaro & Mussio, Irene & Pereyra, Juan S., 2024. "Can political gridlock undermine checks and balances? A lab experiment," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 108(C).
    4. Rasmus Wiese & Steffen Eriksen, 2024. "Willingness to pay for improved public education and public healthcare systems: the role of income mobility prospects," Fiscal Studies, John Wiley & Sons, vol. 45(1), pages 55-76, March.
    5. Bernasconi, Michele & Neunhoeffer, Frieder, 2023. "The income inequality trap: When redistributive preferences do not correct greater inequality," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 107(C).
    6. Liss, Erik & Korpi, Martin & Wennberg, Karl, 2023. "Absolute income mobility and the effect of parent generation inequality: An extended decomposition approach," European Economic Review, Elsevier, vol. 152(C).

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    More about this item

    Keywords

    Income mobility; Taxation and redistribution; Laboratory experiments;
    All these keywords.

    JEL classification:

    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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