Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/86010 
Year of Publication: 
2003
Series/Report no.: 
Tinbergen Institute Discussion Paper No. 03-058/1
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
This paper is concerned with a policy oriented macroeconomic experiment involving an 'international' economy with a relatively small 'home' country and a large 'foreign' country. It compares the economic performance of two alternative tax systems as a means to finance unemployment benefits: a sales-tax-cum-labor-subsidy system versus a wage tax system. The two systems are applied to the home country, while the wage tax system always obtains in the foreign country. In stark contrast with expectations of experts the sales tax system clearly outperforms the wage tax system, using standard economic indicators. It is argued that producers' reluctance to incur costs up-front while being uncertain about product prices can explain this outcome. Several pieces of evidence are provided to support this claim. The results strongly suggest that behavioral aspects have to be taken into account also in applied macroeconomic models.
Subjects: 
laboratory experiment
wage tax
sales tax
macroeconomic policy
JEL: 
A10
C90
C91
D21
D80
E62
H20
Document Type: 
Working Paper

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