Input versus output taxation in an experimental international economy

Arno Riedl and Frans van Winden ()

European Economic Review, 2012, vol. 56, issue 2, 216-232

Abstract: This paper presents the results of 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: a wage tax system and a sales-tax-cum-labor-subsidy system. The two systems are applied to the small country, while the wage tax system always obtains in the large country. The main result is that the sales tax system outperforms the wage tax system, using standard economic indicators. Moreover, it turns out that under the sales tax system economic activities appear to be moving toward the ‘better’ of two theoretical equilibria. It is argued that producers’ reluctance to incur costs up-front while being uncertain about product prices can explain these results. Several pieces of evidence are provided to support this claim. The results strongly suggest that behavioral aspects should be taken into account also in applied macroeconomic models.

Keywords: Laboratory experiment; Wage tax; Sales tax; Macroeconomic policy; Behavioral economics (search for similar items in EconPapers)
JEL-codes: A10 C90 C91 D21 D80 E62 H20 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Working Paper: Input versus Output Taxation in an Experimental International Economy (2004)
Working Paper: Input Versus Output Taxation in an Experimental International Economy (2003)
Working Paper: INPUT VERSUS OUTPUT TAXATION IN AN EXPERIMENTAL INTERNATIONAL ECONOMY (2003)
Working Paper: Input versus Output Taxation in an Experimental International Economy (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:56:y:2012:i:2:p:216-232

DOI: 10.1016/j.euroecorev.2011.09.002

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