Salience and Taxation: Theory and Evidence

American Economic Review · 2009 · Volume 99 · Issue 4

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)

Keywords

Field Experiments, Consumer Economics: Empirical Analysis, Business Taxes and Subsidies including sales and value-added (VAT), State and Local Taxation, Subsidies, and Revenue

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