Working Paper: NBER ID: w19918
Authors: Marina Agranov; Thomas R. Palfrey
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.
Keywords: tax rates; income redistribution; labor supply; democracy
JEL Codes: C92; D63; D72; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| implemented tax rates (H29) | preferences of the median voter (D72) |
| political mechanisms (D72) | tax outcomes (H26) |
| social preferences (D71) | labor supply (J20) |
| social preferences (D71) | voting behavior (D72) |
| higher wage inequality (J31) | higher tax rates (H29) |