Salience and Taxation: Theory and Evidence
Raj Chetty, Adam Looney and Kory Kroft
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| Article Citation |
Chetty, Raj, Adam Looney, and Kory Kroft. 2009. "Salience and Taxation: Theory and Evidence." American Economic Review, 99(4): 1145–77.
DOI:10.1257/aer.99.4.1145
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| Abstract |
Using two strategies, we show that consumers underreact to taxes that are not
salient. First, using a field experiment in a grocery store, we find that posting
tax-inclusive price tags reduces demand by 8 percent. Second, increases in taxes
included in posted prices reduce alcohol consumption more than increases in
taxes applied at the register. We develop a theoretical framework for applied
welfare analysis that accommodates salience effects and other optimization
failures. The simple formulas we derive imply that the economic incidence of
a tax depends on its statutory incidence, and that even policies that induce no
change in behavior can create efficiency losses. (JEL C93, D12, H25, H71)
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| Article Full-Text Access |
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| Additional Materials |
Download Data Set
| Online Appendix
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| Authors |
Chetty, Raj (U CA, Berkeley)
Looney, Adam (Federal Reserve Board)
Kroft, Kory (U CA, Berkeley)
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| JEL Classifications |
C93: Field Experiments
D12: Consumer Economics: Empirical Analysis
H25: Business Taxes and Subsidies including sales and value-added (VAT)
H71: State and Local Taxation, Subsidies, and Revenue
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