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Can Policy Packaging Help Overcome Pigouvian Tax Aversion? A Lab Experiment on Combining Taxes and Subsidies

Gøril L. Andreassen, Steffen Kallbekken and Knut Einar Rosendahl

No 10610, CESifo Working Paper Series from CESifo

Abstract: Tax aversion makes it politically challenging to introduce Pigouvian taxes. One proposed solution to overcome this resistance is to package policies. Using an online lab experiment, we investigate whether combining a tax and a subsidy is perceived as more acceptable than the tax or the subsidy alone. The purpose of the policies is to reduce demand for a good with a negative externality to the socially optimal level. We find that support for a combination of a tax and a subsidy equals the simple average of support for the two instruments alone. Combining a tax and a subsidy therefore does not reduce tax aversion, other than through lower tax rates in the combinations. We also examine potential mechanisms behind the tax aversion. Participants hold more pessimistic beliefs about what share of the tax revenue they will receive when the tax is implemented alone than when it is combined with a subsidy. Furthermore, we find that the participants expect the tax to be more effective in reducing demand for the good with a negative externality than both the subsidy alone and the combinations of tax and subsidy. This belief does not, however, translate into support for the tax.

Keywords: Pigouvian taxes; policy packaging; public support; lab experiment; tax aversion (search for similar items in EconPapers)
JEL-codes: D72 H23 Q54 Q58 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-acc, nep-ene, nep-exp, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10610

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