Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/45983 
Year of Publication: 
2010
Series/Report no.: 
IZA Discussion Papers No. 5145
Publisher: 
Institute for the Study of Labor (IZA), Bonn
Abstract: 
The public finance literature demonstrates the equivalence between consumption and laborincome (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 laborleisure 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.
Subjects: 
experimental economics
tax equivalence
income tax
consumption tax
behavioral economics
JEL: 
C91
H22
H31
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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