There is perhaps no more important question in public finance than who ultimately bears the burden of a tax. According to tax incidence theory, the long-run incidence of a unit tax in competitive markets is independent of the assignment of the liability to pay tax. Moreover, the theory is silent on the possible effects of market institutions on tax incidence. We report data from an experiment designed to address two questions. Is tax incidence independent of the assignment of the liability to pay tax in experimental markets? Is tax incidence independent of the market institution in experimental markets? We conduct laboratory experiments, using double auction and posted offer markets. Based on the results of Kolmogorov-Smirnov tests of experimental market prices, we conclude that the answer to both questions is an emphatic “no.” We report evidence that the observed differences from the theoretical values are economically significant.
Cox, James; Rider, Mark; and Sen, Astha, "TAX INCIDENCE: DO INSTITUTIONS MATTER?
AN EXPERIMENTAL STUDY" (2013). ExCEN Working Papers. 42.