McMaster
Experimental Economics Laboratory
How Work Effort Responds to Wage Taxation: A non-linear versus a linear
tax experiment
Mary-Anne Sillamaa, Wilfred Laurier University
Abstract
This is one of a series of experiments by the author testing predictions
of the labour supply model that comes from the theory of single-period
utility maximization, where utility is a quasi-concave function of consumption
and leisure and where consumption and leisure are both assumed to
be normal goods. The research question is about how people adjust their
work effort in response to a gross wage rate change under a non-linear
tax system in comparison to a linear tax system. The linear tax system
is chosen as the Hausman equivalent of the non-linear system at the starting
wage rate. The prediction is that work effort should be higher under
the linear tax system after the gross wage rate change. Theis experiment
supports the theory.