Labor Supply,Taxation,and the Use of Tax Revenues: A Real-Effort Experiment in Canada,France,and Germany

Abstract

We experimentally investigated three variants of a real-effort game with taxation that differed in the degree of redistribution of tax revenue. Concretely, we compared a Leviathan scenario, where no tax is redistributed, with a situation where tax revenues are used to finance a public good involving neither a direct nor immediate monetary transfer to participants and with a scenario where direct transfer payments are made to each participant. Our results confirm previous findings of a nonlinear decreasing relationship between tax rate and work effort. We found that, for tax rates above 50 percent, the level of effort was highest under direct redistribution, followed by the public-good scenario, and by the Leviathan case. Conducting the experiment in Canada, France, and Germany, we observed average effort (and thus tax revenues) to be higher in France than in Canada and Germany.

Keywords

real-effort experiment taxation redistribution labor supply Laffer curve

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