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American Economic Review: Vol. 99 No. 4 (September 2009)
AER Volume. 99, Issue 4 | 
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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
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)
Article Full-Text Access
Full-text Article
Additional Materials
Download Data Set (83.62 KB) | Online Appendix (169.25 KB)
Authors
Chetty, Raj (U CA, Berkeley)
Looney, Adam (Federal Reserve Board)
Kroft, Kory (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
D12: Consumer Economics: Empirical Analysis
H25: Business Taxes and Subsidies including sales and value-added (VAT)
H71: State and Local Taxation, Subsidies, and Revenue
