Do Market Institutions Effect Tax Incidence?

Among first principles taught in economics is that the statutory incidence of a tax (i.e. who writes the check to remit the payment) is independent with the economic incidence of the tax (i.e. who is actually harmed). Asking me to pay a $1 tax per gallon of gasoline will have the same welfare effects as asking the gas station to remit a $1 tax per gallon they sell me, all other things equal.

Of course, not all other things are equal, and there may be political or administrative reasons for choosing the statutory incidence. For starters, the ability to evade the tax might differ between the two groups, lowering the effective incidence of the tax. But do market institutions, like norms in the price haggling process, matter as well?

Apparently they do, at least if comparing double auction to posted price markets, according to this experimental new paper in Public Finance Review by James Cox (Georgia State), Mark Rider (Georgia State), and Ashta Sen (Sonoma State). Here is the abstract:

According to economic theory, the incidence of a unit tax is independent of the statutory assignment of the liability to pay the tax. However, 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 to sellers or to buyers? Is tax incidence independent of market institutions? We conduct laboratory experiments with double auction (DA) and posted offer (PO) markets. Based on the results of nonparametric and parametric tests of prices generated by laboratory markets, we conclude that the answer to both questions is “no.” We report that observed differences from liability-side equivalence are statistically significant and economically meaningful. We also report that the incidence of the same tax differs between DA and PO markets with the same demand and supply schedules.

So in conclusion, changing market institutions might meaningfully effect the distribution of the tax burden.

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