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

31 Pages Posted: 30 Aug 2010

See all articles by Tomer Blumkin

Tomer Blumkin

Tel Aviv University - Eitan Berglas School of Economics; Ben-Gurion University of the Negev - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Bradley J. Ruffle

McMaster University

Yosef Ganun

Ben-Gurion University of the Negev

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Abstract

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.

Keywords: experimental economics, tax equivalence, income tax, consumption tax, behavioral economics

JEL Classification: C91, H22, H31

Suggested Citation

Blumkin, Tomer and Ruffle, Bradley J. and Ganun, Yosef, Are Income and Consumption Taxes Ever Really Equivalent? Evidence from a Real-Effort Experiment with Real Goods. IZA Discussion Paper No. 5145. Available at SSRN: https://ssrn.com/abstract=1667769

Tomer Blumkin (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

Ben-Gurion University of the Negev - Department of Economics ( email )

Beer-Sheva 84105
Israel
+972 8 647 2268 (Phone)
+972 8 647 2941 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Bradley J. Ruffle

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

HOME PAGE: http://https://socialsciences.mcmaster.ca/people/ruffle-bradley

Yosef Ganun

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheba 84105, 84105
Israel

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