Are Income and Consumption Taxes Ever Really Equivalent? Evidence from a Real-Effort Experiment with Real Goods

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 13.05.2008, 12:15 - 13:30


Presentation by 

Bradley Ruffle (Wilfrid Laurier University)


The public finance literature demonstrates the equivalence between consumptionand labor income (wage) taxes. We construct an environment in which individualsmake real labor-leisure choices and spend their earned income on real goods. We use thisexperimental framework to test whether a labor income tax and an equivalent consumptiontax lead to an identical labor-leisure allocation. Despite controlling for subjectsí work abilityand inherent labor-leisure preferences and not allowing for saving, subjects reduce theirlabor supply significantly more in response to an income tax than they do in response to anequivalent consumption tax. We discuss the economic implications of a policy shift from anincome to a consumption tax.

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