Input versus output taxation in an experimental international economy

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.JEL Classification Number: A10, C90, C91, D21, D80, E62, H20

Fiscal Devaluations in EMU

“…Lipinska and von Thadden (2009), Franco (2011) and Farhi, Gopinath and Itskhoki (2011) provide quantitative evaluations of the effects of a tax change from direct to indirect taxes in general equilibrium models, whereas Franco (2011) and de Mooij and Keen (2012) provide empirical estimations on the effects on net exports, the former using an SVAR for the Portuguese economy and, the latter by means of a dynamic panel of 30 OECD countries from 1965 to 2009. Also consistent with these results, using an experimental economy, Riedl and Winden (2012) find that a shift from wages to consumption taxes improves economic performance, given the producers' reluctance to incur production costs up-front when facing product price uncertainty.…”

Experimental Labor Markets and Policy Considerations: Incomplete Contracts and Macroeconomic Aspects

“…In this section we survey papers that try to assess the impact of taxation on economic performance, mainly focusing on the relation between (labor) taxation and unemployment. In a series of studies, Riedl and van Winden (, , ) show the existence of a vicious circle in the interaction between wage taxes and unemployment and suggest that shifting the tax burden from labor to sales or production can alleviate the unemployment‐boosting effect of taxes. Blumkin et al .…”

“…This strongly suggests that shifting taxation from labor to consumption or sales may have beneficial effects on both production and employment. To explore this, Riedl and van Winden () introduce a sales‐tax‐cum‐labor‐subsidy (STLS) system in the above described economy and compared it to a pure wage tax system. Two treatments are implemented.…”

Experimental Labor Markets and Policy Considerations: Incomplete Contracts and Macroeconomic Aspects

“…To explore this, Riedl and Van Winden (2012) use the same economic environment and introduce a sales-tax-cum-labor-subsidy (STLS) system, which is compared to a pure wage tax (WT) system. Two treatments are implemented.…”