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The Impact of Tax Exclusive and Inclusive Prices on Demand

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  • Bradley J. Ruffle

    ()
    (BGU)

  • Naomi E. Feldman

    ()
    (Research Division Federal Reserve Board Washington, D.C.)

Abstract

We test the equivalence of tax-inclusive and tax-exclusive prices through a series of experiments that differ only in their handling of the tax. Subjects receive a cash budget and decide how much to keep and how much to spend on various attractively priced goods. Subjects spend significantly more when faced with tax-exclusive prices. This treatment effect is robust to different price levels, to initial shopping-cart purchases and persists throughout most of the ten rounds. A goods-level analysis, intra-round revisions as well as results from a third tax-deduction treatment all cast doubt on salience as the source of our findings.

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Bibliographic Info

Paper provided by Ben-Gurion University of the Negev, Department of Economics in its series Working Papers with number 1302.

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Length: 48 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:bgu:wpaper:1302

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Keywords: experimental economics; sales tax; VAT; tax salience;

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  1. Jacob Goldin & Tatiana Homonoff, 2013. "Smoke Gets in Your Eyes: Cigarette Tax Salience and Regressivity," American Economic Journal: Economic Policy, American Economic Association, vol. 5(1), pages 302-36, February.
  2. Blumkin, Tomer & Ruffle, Bradley J. & Ganun, Yosef, 2012. "Are income and consumption taxes ever really equivalent? Evidence from a real-effort experiment with real goods," European Economic Review, Elsevier, vol. 56(6), pages 1200-1219.
  3. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-77, September.
  4. Gabaix, Xavier & Laibson, David I., 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Scholarly Articles 4554333, Harvard University Department of Economics.
  5. Tanjim Hossain & John Morgan, 2006. "...plus shipping and handling: Revenue (non) equivalence in field experiments on ebay," Natural Field Experiments 00270, The Field Experiments Website.
  6. Richard Thaler, 1985. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 4(3), pages 199-214.
  7. Amy Finkelstein, 2009. "E-ZTAX: Tax Salience and Tax Rates," The Quarterly Journal of Economics, MIT Press, vol. 124(3), pages 969-1010, August.
  8. Jacob Goldin, 2012. "Optimal Tax Salience," Working Papers 1385, Princeton University, Department of Economics, Industrial Relations Section..
  9. KalaycI, Kenan & Potters, Jan, 2011. "Buyer confusion and market prices," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 14-22, January.
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Cited by:
  1. Ackermann, Hagen & Fochmann, Martin, 2014. "The effect of straight-line and accelerated depreciation rules on risky investment decisions: An experimental study," arqus Discussion Papers in Quantitative Tax Research 158, arqus - Arbeitskreis Quantitative Steuerlehre.
  2. Johannes Abeler & Simon Jäger, 2013. "Complex Tax Incentives - An Experimental Investigation," CESifo Working Paper Series 4231, CESifo Group Munich.

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