The Non-Equivalence of Labor Market Taxes: A Real-Effort Experiment

Abstract

Under full rationality, a labor market tax levied on employers and a corresponding income tax levied on employees are equivalent. With boundedly rational agents, this equivalence is no longer obvious and the different reactions to these two taxes become important for policy making, political economics, and optimal taxation theory. In a real effort laboratory experiment, we study the differential effects of the two taxes on preferences concerning the size of the public sector, subjective well-being, labor supply, and on-the-job performance. Our findings suggest that employer-side taxes induce preferences for a larger public sector. In addition, subjective well-being is higher when the taxes are levied on employers while labor supply is lower, at least at the extensive margin. We discuss three mechanisms that may underlie these results.JEL classification: C91, H22, H30

Social-status ranking: a hidden channel to gender inequality under competition

“…Part 1 is the same in all sessions and is taken from Weber and Schram (2017). Participants are presented with a sequence of pairs of 10 9 10 matrices filled with two-digit numbers.…”

Tax aversion in labor supply

“…5 Hayashi et al (2013) failed to find tax aversion in the binary decision of whether to accept a job in the laboratory; when subjects were shown net wages alongside gross wages, labor supply did not vary with tax structure. 6 To our knowledge, among the experimental literature within economics only Weber and Schram (2013) investigate statutory incidence -measuring subjects' effort when facing taxes imposed either on employees or on employers. In the experimental instructions used by Weber and Schram (2013), however, the word tax is never mentioned and the wage changes as workers provide effort, so the differences in productivity across treatments (observed among men but not women) appear to be due to their ability (or inability) to do the somewhat complicated math required to calculate the net wage.…”

“…6 To our knowledge, among the experimental literature within economics only Weber and Schram (2013) investigate statutory incidence -measuring subjects' effort when facing taxes imposed either on employees or on employers. In the experimental instructions used by Weber and Schram (2013), however, the word tax is never mentioned and the wage changes as workers provide effort, so the differences in productivity across treatments (observed among men but not women) appear to be due to their ability (or inability) to do the somewhat complicated math required to calculate the net wage. 7 The explanation presented in Lehmann et al (2013) centers on wage rigidity: that wages change less in response to employer side taxes as in Muysken et al (1999).…”

“…Much of this literature examines the effect of taxes, which may or may not be salient and may or may not be complex, on workers who must calculate their net wage from their gross wage and the tax schedule (e.g., Swenson, 1988;Blumkin et al, 2012;Hayashi et al, 2013;Weber and Schram, 2013;Doerrenberg and Duncan, 2014;Abeler and Jager, 2015). 4 Other research examines labor supply responses to net-of-tax wages without explicit mention of taxes (Sillamaa, 1998(Sillamaa, , 1999a.…”

Earnings Responses to Social Security Contributions

“…experiments by Weber and Schram (2013) and Kerschbamer and Kirchsteiger (2000) found that subjects have on average a higher after-tax pay-off, when their negotiation partners have to pay the tax. They propose that the legal burden of a tax might induce a moral obligation to bear it.…”