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Effects of Income Mobility and Tax Persistence on Income Redistribution and Inequality

Agranov, Marina and Palfrey, Thomas R. (2020) Effects of Income Mobility and Tax Persistence on Income Redistribution and Inequality. European Economic Review, 123 . Art. No. 103372. ISSN 0014-2921. doi:10.1016/j.euroecorev.2020.103372.

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We conduct a controlled laboratory experiment to explore the effect of income mobility and tax persistence on equilibrium tax rates and inequality. The theoretical framework of the experiment captures the essential elements of the prospect of upward mobility (POUM) hypothesis in a two-period model and characterizes the dynamic equilibrium tax rates. The experiment allows for a clean test of causality between income mobility and redistributive taxes. Outcomes observed in the experiment are mostly consistent with the comparative static predictions of the model. Mobility and stickiness of taxes lead to lower tax rates, but neither is sufficient by itself. When tax rates are persistent, mobility has a significant negative effect on median implemented taxes. An increase in tax persistence decreases tax rates and increases inequality when mobility is present. An increase in mobility decreases inequality but the effect is modest and not statistically significant.

Item Type:Article
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URLURL TypeDescription ItemWorking Paper
Palfrey, Thomas R.0000-0003-0769-8109
Additional Information:© 2020 Elsevier B.V. Received 22 February 2019, Accepted 8 January 2020, Available online 20 January 2020. We thank the editor and referees for their comments and suggestions. We thank Michael McBride and the staff of the Experimental Social Science Laboratory (ESSL) at UC Irvine for their support and for granting access to the laboratory and subject pool. We thank the Hacker Social Science Experimental Laboratory (SSEL) at Caltech for supporting the software development for the experiment. We gratefully acknowledge the financial support of the National Science Foundation (SES-1426560), the Gordon and Betty Moore Foundation (SES-1158), and the Russell Sage Foundation.
Funding AgencyGrant Number
Gordon and Betty Moore FoundationSES-1158
Russell Sage FoundationUNSPECIFIED
Subject Keywords:Income mobility; Taxation and redistribution; Laboratory experiments
Classification Code:JEL: D7; C9; H21
Record Number:CaltechAUTHORS:20200124-151122461
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Official Citation:Marina Agranov, Thomas R. Palfrey, The effects of income mobility and tax persistence on income redistribution and inequality, European Economic Review, Volume 123, 2020, 103372, ISSN 0014-2921, (
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:100911
Deposited By: Tony Diaz
Deposited On:25 Jan 2020 03:23
Last Modified:16 Nov 2021 17:57

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