A Choice Experiment on Taxes: Are Income and Consumption Taxes Equivalent?

25 Pages Posted: 2 Apr 2016 Last revised: 6 Apr 2016

See all articles by Hirofumi Kurokawa

Hirofumi Kurokawa

School of Economics and Management

Tomoharu Mori

College of Comprehensive Psychology, Ritsumeikan University; Research Institute for Socionetwork Strategies, Kansai University

Fumio Ohtake

Osaka University - Center for Infectious Disease Education and Research

Date Written: April 6, 2016

Abstract

We test the equivalence of income and consumption taxes through a choice experiment. Under a given set of income and consumption parameters, subjects were asked to choose among an income tax of 20%, a consumption tax of 25% (which is an equivalent tax burden), a consumption tax of 22%, and a consumption tax of 20%. Our results showed that subjects prefer income tax to consumption tax when the nominal consumption tax rate is higher than the nominal income tax rate. However, subjects tend to prefer consumption tax to income tax when the nominal tax rates are identical. Our result, that subjects prefer income tax to consumption tax despite a higher tax burden, implies the consumption tax miscalculation bias. The consumption tax miscalculation bias is one where subjects miscalculate the amount of consumption tax as if it is declared by tax inclusive, as in the case of income tax, despite consumption tax being tax exclusive. If the income tax burden is equivalent to the consumption tax burden, subjects prefer income tax. This result implies that income and consumption taxes are not equivalent due to the consumption tax miscalculation bias.

Keywords: Tax equivalence, Income tax, Consumption tax, Misperception of tax, Behavioral and experimental economics

JEL Classification: H24, C91

Suggested Citation

Kurokawa, Hirofumi and Mori, Tomoharu and Ohtake, Fumio, A Choice Experiment on Taxes: Are Income and Consumption Taxes Equivalent? (April 6, 2016). ISER Discussion Paper No. 966, Available at SSRN: https://ssrn.com/abstract=2755864 or http://dx.doi.org/10.2139/ssrn.2755864

Hirofumi Kurokawa (Contact Author)

School of Economics and Management ( email )

Japan

Tomoharu Mori

College of Comprehensive Psychology, Ritsumeikan University ( email )

2-150, Iwakuracho
Ibaraki, Osaka 5678570
Japan

Research Institute for Socionetwork Strategies, Kansai University ( email )

3-3-35 Yamatecho
Osaka, 564-8680
Japan

Fumio Ohtake

Osaka University - Center for Infectious Disease Education and Research ( email )

1-7 Machikaneyamacho
Toyonaka
Osaka, 560-0043
Japan

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