Tax liability side equivalence in gift-exchange labor markets

Tax Liability Side Equivalence (tax LSE) claims that the statutory incidence of a tax is irrelevant for its economic incidence. Tax LSE is predicted to hold in gift-exchange labor markets if workers' effort choices exclusively depend on the net wage, but breaks down if they partially depend on the gross wage paid to workers. This is the case if the tax is perceived to be external to the gift-exchange relationship. We experimentally test tax LSE in a gift-exchange labor market and find that it holds very well. (c) 2004 Elsevier B.V. All rights reserved.