Salience and Taxation: Theory and Evidence
- (pp. 1145-77)
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)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.99.4.1145Additional Materials
JEL Classification
- 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