ISP Working Paper Number 05-17

Experimental Evidence for Tax Policy Design

Jorge Martinez-Vazquez, Mark Rider, Lucy F. Ackert and Ann Gillette, August 2005

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Abstract:

In this paper we build on the work of Engelmann and Strobel (2004) and Ackert, Martinez-Vazquez, and Rider (2005) to examine the potential role of social preferences in tax policy design. We randomly assign each of the twenty participants in a session to one of four groups. The payoffs to each participant are determined by majority vote of the participants in a given group. We randomly assign each participant a pre-tax income which remains the same throughout the experiment to control for the potential confounding effect of risk pooling equilibria. Based on statistical analysis of the data generated by these experiments, we find support for the hypothesis that minimax preferences of Rawls (1971) or the inequality aversion model of Fehr and Schmidt (1999) can account for individual choices over alternative tax structures.