Tax Incidence: Do Institutions Matter? An Experimental Study. (November 2018)

• Record Type: Journal Article
• Authors: Cox, James C.; Rider, Mark; Sen, Astha
• Is Part Of: Public finance review. Volume 46:Number 6(2018:Nov.)
• Page Start: 899
• Page End: 925
• Publication Date: 2018-11
• Subjects: tax incidence -- market institutions -- experiment; Finance, Public -- Periodicals; 336.005
• DOI: 10.1177/1091142117700720
• Languages: English
• ISSNs: 1091-1421

Abstract

According to economic theory, the incidence of a unit tax is independent of the statutory assignment of the liability to pay the tax. However, the theory is silent on the possible effects of market institutions on tax incidence. We report data from an experiment designed to address two questions. Is tax incidence independent of the assignment of the liability to pay tax to sellers or to buyers? Is tax incidence independent of market institutions? We conduct laboratory experiments with double auction (DA) and posted offer (PO) markets. Based on the results of nonparametric and parametric tests of prices generated by laboratory markets, we conclude that the answer to both questions is "no." We report that observed differences from liability-side equivalence are statistically significant and economically meaningful. We also report that the incidence of the same tax differs between DA and PO markets with the same demand and supply schedules.