Equilibrium tax rates and income redistribution: A laboratory study

Abstract

This paper reports results from a laboratory experiment that investigates the Meltzer–Richard model of equilibrium tax rates, inequality, and income redistribution. The experiment varies the amount of wage inequality and the political process used to determine tax rates. We find that higher inequality leads to higher tax rates; the effect is significant and large in magnitude. The tax rates and labor supply functions are both quantitatively close to the theory. The result is robust to the political institution. The theoretical model of Meltzer–Richard is extended to incorporate social preferences in the form of altruism and inequity aversion, which are found to have negligible effects in the data.

Additional Information

© 2015 Elsevier B.V. Received 24 November 2014. Received in revised form 7 August 2015. Accepted 16 August 2015. Available online 22 August 2015. The financial support of the National Science Foundation (SES-0962802), the Russell Sage Foundation, and the Gordon and Betty Moore Foundation (1158) is gratefully acknowledged. The paper benefited from discussion and commentary at several conference and seminar presentations. We are especially grateful for comments and suggestions from Ernesto Dal Bo, John Londregan, Thomas Romer, as well as the referees and editor. Kirill Pogorelskiy provided excellent research assistance.

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