Impacts of Tax Structure on Productivity: A Laboratory Experiment

Purpose – The study aims to investigate the impacts of tax structure - income tax versus wage rate tax - on the productivity of individuals by designing a laboratory experiment to look at the effects of different tax structureson the productivity of individuals. Design/Methodology/Approach – The study measured the differences in productivity of students doing a real effort task by using three treatment groups: the control (or without tax) treatment and two tax treatments, where taxes were presented differently (wage rate tax or income tax) having the same real payoff. Participants were drawn from four different recitation classes at the University of the Philippines Los Baños. The study employed an Ordinary Least Squares regression analysis to assess the ability of tax structures to lessen the impacts of tax disincentive on the participants. Findings – The study shows that there is a significant difference in the productivity of individuals faced with an income tax and those faced with a wage rate tax. Moreover, older individuals and those who have greater difficulty with the task demonstrate increasing productivity while individuals who have prior knowledge of the task appear to have lower productivity. Research Implications – Various tools and experimental approaches are required in looking at the framing effects in tax. It is also suggested that one should examine the errors done during the task given a possible “experimenter’s bias”, since there is an apparent increase when presented with tax. Such errors may have implications for an employee’s work quality. Hence, future studies may wish to consider alternative ways to deal with these issues.