Salience and Taxation: Theory and Evidence
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.
Year of publication: |
2009
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Authors: | Looney, Adam ; Kroft, Kory ; Chetty, Raj |
Institutions: | Department of Economics, Harvard University |
Saved in:
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