Tax Policy Design in the Presence of Social Preferences: Some Experimental Evidence

Lucy F. Ackert, Jorge Martinez-Vazquez, and Mark Rider
Working Paper 2004-33
December 2004

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This paper reports the results of experiments designed to examine whether a taste for fairness affects people’s preferred tax structure. Building on the Fehr and Schmidt (1999) model, we devise a simple test for the presence of social preferences in voting for alternative tax structures. The experimental results show that individuals demonstrate concern for their own payoff and inequality aversion in choosing among alternative tax structures. However, concern for redistribution decreases when it leads to increasing deadweight losses. Our findings have important implications for the design of optimal tax theory.

JEL classification: C92, D63, H21, H23

Key words: tax policy, social preferences, fairness

The authors gratefully acknowledge the financial support of the Federal Reserve Bank of Atlanta and the International Studies Program of Georgia State University. The authors thank Budina Naydenova for research assistance and Francisco Arze, Ann Gillette, Bryan Church, Govind Hariharan, Luc Noiset, and Roy Wada for helpful discussions and comments. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Lucy F. Ackert, Michael J. Coles College of Business, 1000 Chastain Road, Kennesaw State University, Kennesaw, Georgia 30144, 770-423-6111, 770-499-3209 (fax), or to Lucy F. Ackert, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, NE, Atlanta, Georgia 30309-4470.