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Input versus Output Taxation in an Experimental International Economy

Arno Riedl and Frans van Winden ()

No 1344, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: macroeconomic policy; sales tax; wage tax; laboratory experiment; behavioral economics (search for similar items in EconPapers)
JEL-codes: A10 C90 C91 D21 D80 E62 H20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp
Date: 2004-10
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Published in: European Economic Review, 2012, 56 (2), 216-232

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Related works:
Journal Article: Input versus output taxation in an experimental international economy (2012) Downloads
Working Paper: Input Versus Output Taxation in an Experimental International Economy (2003) Downloads
Working Paper: INPUT VERSUS OUTPUT TAXATION IN AN EXPERIMENTAL INTERNATIONAL ECONOMY (2003) Downloads
Working Paper: Input versus Output Taxation in an Experimental International Economy (2003) Downloads
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