Equilibrium Tax Rates and Income Redistribution: A Laboratory Study
Paper Number:
1385
Date:
01/31/2014
Abstract:
This paper reports results from a laboratory experiment that investigates the Meltzer-Richard model of
equilibrium tax rates, inequality, and income redistribution. We also extend that model to incorporate
social preferences in the form of altruism and inequality aversion. The experiment varies the amount
of inequality and the collective choice procedure to determine tax rates. We report four main findings.
First, higher wage inequality leads to higher tax rates. The effect is significant and large in magnitude.
Second, the average implemented tax rates are almost exactly equal to the theoretical ideal tax rate of
the median wage worker. Third, we do not observe any significant differences in labor supply or average
implemented tax rates between a direct democracy institution and a representative democracy system
where tax rates are determined by candidate competition. Fourth, we observe negligible deviations
from labor supply behavior or voting behavior in the directions implied by altruism or inequality aversion.
Paper Length:
38 pages
Paper:
SSWP_1385.pdf