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American Economic Review: Vol. 99 No. 4 (September 2009)

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Salience and Taxation: Theory and Evidence

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

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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Authors

Chetty, Raj (U CA, Berkeley)
Looney, Adam (Federal Reserve Board)
Kroft, Kory (U CA, Berkeley)

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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