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
Date Written: May 22, 2015
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: Suggested Citation