Equilibrium tax rates and income redistribution: A laboratory study

This paper reports results from a laboratory experiment that investigates the Meltzer–Richard model of equilibrium tax rates, inequality, and income redistribution. The experiment varies the amount of wage inequality and the political process used to determine tax rates. We find that higher inequality leads to higher tax rates; the effect is significant and large in magnitude. The tax rates and labor supply functions are both quantitatively close to the theory. The result is robust to the political institution. The theoretical model of Meltzer–Richard is extended to incorporate social preferences in the form of altruism and inequity aversion, which are found to have negligible effects in the data. •We test the Meltzer–Richard model in a laboratory experiment.•Results are mainly supportive of the theory.•Greater inequality led to higher tax rates and more economic inefficiency.•Results are robust to the voting mechanism used to determine tax rates.•No evidence for social preferences was observed.