Salience and Taxation: Theory and Evidence

Authors: Chetty, Raj; Looney, Adam; Kroft, Kory

Source: The American Economic Review, Volume 99, Number 4, September 2009 , pp. 1145-1177(33)

Publisher: American Economic Association

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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.

Document Type: Research article

DOI: http://dx.doi.org/10.1257/aer.99.4.1145

Publication date: 2009-09-01

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The American Economic Review is a general-interest economics journal. The journal is published quarterly and contains articles on a broad range of topics. Established in 1911, the AER is among the nation's oldest and most respected scholarly journals in the economics profession.
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