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Salience and Taxation: Theory and Evidence

2009; American Economic Association; Volume: 99; Issue: 4 Linguagem: Inglês

10.1257/aer.99.4.1145

1944-7981

Raj Chetty, Adam Looney, Kory Kroft,

Taxation and Compliance Studies

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)