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The Non-Equivalence of Labour Market Taxes: A Real-Effort Experiment

The Economic Journal, 2016, Forthcoming, DOI:10.1111/ecoj.12365.

54 Pages Posted: 23 Feb 2013 Last revised: 2 Mar 2016

Matthias Weber

Bank of Lithuania - Center for Excellence in Finance and Economic Research (CEFER); Vilnius University

Arthur J. H. C. Schram

University of Amsterdam - Faculty of Economics and Business (FEB); Tinbergen Institute

Multiple version iconThere are 2 versions of this paper

Date Written: May 22, 2015

Abstract

Under full rationality, a labour market tax levied on employers and a corresponding income tax levied on employees are equivalent. With boundedly rational agents, this equivalence is no longer obvious. In a real-effort experiment, we study the effects of these taxes on preferences concerning the size of the public sector, subjective well-being, labor supply, and on-the-job performance. Our findings suggest that employer-side taxes induce preferences for a larger public sector. Subjective well-being is higher under employer-side taxes while labor supply is lower, at least at the extensive margin. We discuss three mechanisms that may underlie these results.

Keywords: tax perception, liability side equivalence, political economy, labour supply

JEL Classification: C91, H22, H30

Suggested Citation

Weber, Matthias and Schram, Arthur J. H. C., The Non-Equivalence of Labour Market Taxes: A Real-Effort Experiment (May 22, 2015). The Economic Journal, 2016, Forthcoming, DOI:10.1111/ecoj.12365.. Available at SSRN: https://ssrn.com/abstract=2220720 or http://dx.doi.org/10.2139/ssrn.2220720

Matthias Weber (Contact Author)

Bank of Lithuania - Center for Excellence in Finance and Economic Research (CEFER) ( email )

Totoriu g. 4
Vilnius, LT-01121
Lithuania

Vilnius University ( email )

Sauletekio ave. 11, Vilnius
Vilnius
Lithuania

Arthur J. H. C. Schram

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 18
CREED
Amsterdam 1018 WB
Netherlands
+31 (0)20 525 4293 (Phone)

HOME PAGE: http://www.fee.uva.nl/creed/PEOPLE/Arthurs.htm

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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