Are income and consumption taxes ever really equivalent? Evidence from a real-effort experiment with real goods |
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Authors: | Tomer Blumkin Bradley J Ruffle Yosef Ganun |
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Institution: | Department of Economics, Ben-Gurion University, Beer Sheva 84105, Israel |
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Abstract: | The public finance literature demonstrates the equivalence between consumption and labor-income (wage) taxes. We introduce an experimental paradigm in which individuals make real labor-leisure choices and spend their earned income on real goods. We use this paradigm to test whether a labor-income tax and an equivalent consumption tax lead to identical labor-leisure allocations. Despite controlling for subjects' work ability and inherent labor-leisure preferences and disallowing saving, subjects reduce their labor supply significantly more in response to an income tax than to an equivalent consumption tax. We discuss the economic implications of a policy shift to a consumption tax. |
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