A Taste for Taxes: Minimizing Distortions Using Political Preferences

The authors conduct an experiment with online workers to assess whether the distortionary effect of a tax is sensitive to the ideological match between taxpayer and tax expenditures. They find that, among self-identified political moderates, the labor supply elasticity with respect to the net of tax wage is significantly smaller when individuals pay taxes to a favored government agency as compared to an unfavored one. While the tax has a significant distortionary effect in the latter case, with a point estimate for the labor supply elasticity of approximately 0.77, the elasticity point estimate is close to zero when taxes go to a favored agency. There is also an increase in total output for the matched population among moderates. There is no evidence that these effects hold for self-identified liberals or conservatives.