Tax and Subsidy Incidence Equivalence Theories: Experimental Evidence from Competitive Markets

47 Pages Posted: 10 Oct 2001

Date Written: October 2001

Abstract

A basic tenet in elementary microeconomics is tax incidence equivalence. This tenet holds that the burden of a unit tax on buyers and sellers is independent of who actually pays the tax. By contrast, policymakers and the public often mistake statutory incidence for economic incidence. Recent evidence of the empirical validity of tax incidence equivalence is mixed. In this paper, using competitive laboratory markets, I test both tax incidence equivalence and an analogous theorem I refer to as subsidy incidence equivalence. For sufficiently large markets, the results show strong support for both theories. In these markets, there is little to no evidence, even in the short run, of the popular misperception that statutory incidence equals economic incidence. In smaller markets in which competitive forces are weaker and relative bargaining strengths may play a role, the evidence for tax incidence equivalence is weaker as minor price discrepancies may persist between markets.

Keywords: tax incidence equivalence, subsidy, competitive markets, experimental markets, framing effects

JEL Classification: C92, D41, H22

Suggested Citation

Ruffle, Bradley J., Tax and Subsidy Incidence Equivalence Theories: Experimental Evidence from Competitive Markets (October 2001). Available at SSRN: https://ssrn.com/abstract=286738 or http://dx.doi.org/10.2139/ssrn.286738

Bradley J. Ruffle (Contact Author)

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

HOME PAGE: http://https://socialsciences.mcmaster.ca/people/ruffle-bradley

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