Are Income and Consumption Taxes Ever Really Equivalent? Evidence from a Real-Effort Experiment with Real Goods
31 Pages Posted: 30 Aug 2010
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: Suggested Citation