Taxation and the Veil of Ignorance--A Real Effort Experiment on the Laffer Curve.

In this paper we address the role of the veil of ignorance on work incentives and tax rates in a two-person real effort experiment. We find that effort levels decrease with a rise in tax rates. Tax revenues peak at intermediate tax rates of 50 percent to 65 percent, supporting the existence of a Laffer curve in taxation. Tax authorities do not exploit their power to tax in full, which is compatible both with revenue maximizing but also fair behavior. Behind the veil of ignorance, subjects care more for efficiency and restrict the power to tax more than in case their position (taxpayer or tax authority) is fixed in advance. Copyright 2003 by Kluwer Academic Publishers