Tax or Transfer? The Framing Effect of Redistribution Policy: Experimental Evidence

Abstract: This paper investigates whether the framing of redistribution policy affects work effort decisions. I devised two theoretically equivalent treatments: the redistributive tax (TAX) treatment and the redistributive transfer (TRANSFER) treatment and study subjects’ work effort choices in a novel public goods experiment. I find evidence supporting the existence of the framing effect. On average, subjects in the TRANSFER treatment group chose 25.27% higher effort levels than those in the TAX treatment group. Then, I explore possible mechanisms that may account for the framing effect. The results of the experiment do not support the cognitive ability hypothesis. When the fairness perception hypothesis is tested I find there is no significant difference in fairness perception between the two treatments. However, surprisingly, the negative effect of using the TAX rather than the TRANSFER framing is significantly larger among subjects who judge their mechanism to be unfair. The results can shed light on the normative debate about the extent to which taxes or transfers should be used more actively to address widening income inequality.

DOI: 10.1.1.388.6083
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