Income Tax or Employer's Contribution – an Experiment on the Perception of 'Economically Equivalent' Duties
Tinbergen Institute MPhil Thesis
44 Pages Posted: 16 May 2018
Date Written: July 22, 2011
Under full rationality a labor income tax and a corresponding employer’s contribution are equivalent. Without full rationality this equivalence is no longer obvious. If people react differently to these duties this has direct impact on policy making and also has consequences for optimal taxation theory and political economics. This paper examines how people react to these duties in a laboratory experiment. This is primarily done with respect to labor supply decisions and with respect to the value individuals attribute to working under distinct tax regimes. We find that these duties are not equivalent. The differences between the regimes are especially pronounced with respect to the value attributed to having a job. Subjects are will- ing to bear higher costs to be able to work facing an income tax than facing an employer’s contribution even when the two are economically equivalent.
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