Tax and Subsidy Incidence Equivalence Theories: Experimental Evidence from Competitive Markets
47 Pages Posted: 10 Oct 2001
Date Written: October 2001
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: Suggested Citation