Posted by Christie Malry on September 18, 2014 at 1:44 pm
In an ultimatum game, a sum of money is to be shared between two parties. If the second party is happy with the split proposed by the first, both get their shares. If he is not, neither gets anything. Research shows that, should the first party offer less than about 20-25%, their offer will be rejected as unfair.
I wondered whether you could extend this to tax, as follows. The game operates as before, only both parties are taxed on their share: 0% on the first £10, 25% on the next £30 and 40% thereafter. Tax money is discarded.
As far as I can tell, there is no existing study along these lines, which probably should be sufficient to tell me it's a stupid idea. But would it tell us anything useful? What would it reveal?
I suppose one line of thought might be that the 20-25% rule might reassert itself, based on post-tax amounts. In the scenario above, an offer of £16 would mean the second party would retain £14.50 compared to the first party's £58.90. The taxman would take £26.60.
An offer of £30 is needed to ensure both parties receive more than the taxman. P1 takes home £50.50, P2 £25.00 and the taxman £24.50. The minimum amount the taxman can be left with is £23.00 for offers between £40 and £60. Might one of these scenarios become an equilibrium, in order to maximise the amount players receive compared to the taxman?
Critics may reasonably point out that tax isn't wasted, so the exercise is artificial. A different experiment in which tax is obviously wasted or obviously spent on good things might help tease out this factor.
Any other thoughts?