Monday, March 30, 2009

The Psychology of Taxation

An article in the Journal of Economic Psychology (A Behavioural Laffer curve: Emergence of a social norm of fairness in a real effort experiment, Levy-Garboua, Masclet and Montmarquette, 2008) raises concerns about the impact of marginal tax rates which are viewed as unfair. Pairs of players participated in their experiment, the first being the tax payer, the second the tax setter. Player A performed a series of tasks for reward, but “taxed” at a particular rate, with the proceeds going to player B. In the endogenous condition player B chose a tax rate, while in the exogenous condition rates were randomly assigned.

The authors find that participants in their experiment reacted to “punish” tax setters who set rates too high (>50%) by reducing their effort. They develop a model where social norms promote productive efficiency in the long run.

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