A Choice Experiment on Taxes: Are Income and Consumption Taxes Equivalent?

Abstract

We test the equivalence of income and consumption taxes through a choice experiment. Under a given set of income and consumption parameters, subjects were asked to choose among an income tax of 20%, a consumption tax of 25% (which is an equivalent tax burden), a consumption tax of 22%, and a consumption tax of 20%. Our results showed that subjects prefer income tax to consumption tax when the nominal consumption tax rate is higher than the nominal income tax rate. However, subjects tend to prefer consumption tax to income tax when the nominal tax rates are identical. Our result, that subjects prefer income tax to consumption tax despite a higher tax burden, implies the consumption tax miscalculation bias. The consumption tax miscalculation bias is one where subjects miscalculate the amount of consumption tax as if it is declared by tax inclusive, as in the case of income tax, despite consumption tax being tax exclusive. If the income tax burden is equivalent to the consumption tax burden, subjects prefer income tax. This result implies that income and consumption taxes are not equivalent due to the consumption tax miscalculation bias.

Labor Supply Reaction to Wage Cuts and Tax Increases: A Real-Effort Experiment

“…Our study contributes to the literature on behavioral biases on taxes, for example, tax salience (e.g., Chetty et al 2009;Feldman and Ruffle 2015), non-equivalence between income and consumption taxes (Blumkin et al 2012;Kurokawa et al 2016), and overestimation of the changes in tax rates compared to changes in tax bases (Blaufus et al 2013). Our study also contributes to the experimental literature on tax evasion and compliance (e.g., Doerrenberg and Duncan 2014;Pántya et al 2016).…”

Labor Supply Reaction to Wage Cuts and Tax Increases: A Real-Effort Experiment

“…Our study contributes to the literature on behavioral biases on taxes, for example, tax salience (e.g., Chetty et al 2009;Feldman and Ruffle 2015), non-equivalence between income and consumption taxes (Blumkin et al 2012;Kurokawa et al 2016), and overestimation of the changes in tax rates compared to changes in tax bases (Blaufus et al 2013). Our study also contributes to the experimental literature on tax evasion and compliance (e.g., Doerrenberg and Duncan 2014;Pántya et al 2016).…”

An experimental comparison of rebate and matching in charitable giving: The case of Japan

“…When all income goes to consumption, the relationship between the income tax rate (y) and the consumption tax rate (c) is as follows: y = c/(1 + c) Blumkin et al (2012). show that subjects decrease their labor supply under an income tax system more than the equivalent consumption tax system Kurokawa et al (2020). show that subjects prefer an income tax over the equivalent consumption tax.2 According to data released by the by Cabinet Office (2019b), 13.4% of Japanese donors who did not use the rebate scheme in 2018 stated that it is because they did not file tax returns.…”