Equilibrium Tax Rates and Income Redistribution: A Laboratory Study

38 Pages Posted: 3 Mar 2014

See all articles by Marina Agranov

Marina Agranov

California Institute of Technology

Thomas R. Palfrey

California Institute of Technology - Division of the Humanities and Social Sciences

Date Written: February 2014

Abstract

This paper reports results from a laboratory experiment that investigates the Meltzer-Richard model of equilibrium tax rates, inequality, and income redistribution. We also extend that model to incorporate social preferences in the form of altruism and inequality aversion. The experiment varies the amount of inequality and the collective choice procedure to determine tax rates. We report four main findings. First, higher wage inequality leads to higher tax rates. The effect is significant and large in magnitude. Second, the average implemented tax rates are almost exactly equal to the theoretical ideal tax rate of the median wage worker. Third, we do not observe any significant differences in labor supply or average implemented tax rates between a direct democracy institution and a representative democracy system where tax rates are determined by candidate competition. Fourth, we observe negligible deviations from labor supply behavior or voting behavior in the directions implied by altruism or inequality aversion.

Suggested Citation

Agranov, Marina and Palfrey, Thomas R., Equilibrium Tax Rates and Income Redistribution: A Laboratory Study (February 2014). NBER Working Paper No. w19918. Available at SSRN: https://ssrn.com/abstract=2403656

Marina Agranov (Contact Author)

California Institute of Technology ( email )

Pasadena, CA 91125
United States

HOME PAGE: http://www.hss.caltech.edu/~magranov/

Thomas R. Palfrey

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
301A Baxter Hall
Pasadena, CA 91125
United States
626-395-4088 (Phone)
626-4432-1726 (Fax)

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