A Behavioral Economic Study of Tax Rate Selection by the Median Voter: Can the Tax Rate Be Influenced by the Name of the Publicly Provided Private Good?

This paper presents the results of a behavioraleconomics study to test if the tax rates submitted to finance the public provision of aprivate good are influenced by changing the name of the private good. A revealed-preferencelaboratory decision-making experiment is used to test if participants choosesignificantly different tax rates to support provision of a private good named as a health careinvestment compared to an identical good named as a neutral monetaryinvestment. Althoughsome previous studies focusing on both framing and context effects finddifferences associated with health versus non-health environments, thesestudies have not involved voting over public provision of a private good. Inour experimental environment, participants with different income endowments providetheir preferred proportional tax rates for financing public provision of aprivate good in either a neutral or a health context. The implemented tax rate is the median preferred taxrate, and once the budget is determined, each participant receives the samequantity of the publicly provided private good. In each context, the payoff functions arethe same. The only difference between the contexts is the name attached to thepublicly provided private good, regardlessof the name attached to the publicly provided private good, consuming it imposes noexternalities. This controls for the positive externality characteristics ofmany health care goods, but not for preferences evoked by the merit goodcharacter of health care which factor into decisions about the public provisionof health care. We find that the theoretical predictions of the median votermodel are generally supported by the data. However, the conjecture that the implemented tax ratewould be affected by context is not supported by the results.