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E-ZTax: Tax Salience and Tax Rates

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  • Amy Finkelstein
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    Abstract

    This paper tests the hypothesis that the salience of a tax system affects equilibrium tax rates. To do this, I analyze how toll rates change after toll facilities adopt electronic toll collection. Unlike manual toll collection, in which the driver must hand over cash at the toll collection plaza, electronic toll collection automatically debits the toll amount as the car drives through the toll plaza, thereby plausibly decreasing the salience of the toll. I find robust evidence that toll rates increase following the adoption of electronic toll collection. My estimates suggest that, in steady state, toll rates are 20 to 40 percent higher than they would have been without electronic toll collection. Consistent with the hypothesis that decreased tax salience is responsible for the increase in toll rates, I also find evidence that the short run elasticity of driving with respect to the actual toll declines (in absolute value) following the adoption of electronic toll collection. I consider a variety of alternative explanations for these results and conclude that these are unlikely to be able to explain the findings.

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    File URL: http://www.nber.org/papers/w12924.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12924.

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    Date of creation: Feb 2007
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    Handle: RePEc:nbr:nberwo:12924

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    1. Robert J. Barro & David B. Gordon, 1983. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
    2. Brennan,Geoffrey & Buchanan,James M., 1980. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521233293.
    3. Friedman, Milton, 1998. "Two Lucky People," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226264141, April.
    4. Gary S. Becker & Casey B. Mulligan, 1998. "Deadweight Costs and the Size of Government," University of Chicago - George G. Stigler Center for Study of Economy and State 144, Chicago - Center for Study of Economy and State.
    5. Christopher Timmins, 2002. "Measuring the Dynamic Efficiency Costs of Regulators' Preferences: Municipal Water Utilities in the Arid West," Econometrica, Econometric Society, vol. 70(2), pages 603-629, March.
    6. Melissa S. Kearney, 2005. "The Economic Winners and Losers of Legalized Gambling," NBER Working Papers 11234, National Bureau of Economic Research, Inc.
    7. Dollery, Brian E & Worthington, Andrew C, 1996. " The Empirical Analysis of Fiscal Illusion," Journal of Economic Surveys, Wiley Blackwell, vol. 10(3), pages 261-97, September.
    8. David Sappington & J. Sidak, 2003. "Incentives for Anticompetitive Behavior by Public Enterprises," Review of Industrial Organization, Springer, vol. 22(3), pages 183-206, May.
    9. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    10. Hau, Timothy D., 1992. "Congestion charging mechanisms for roads : an evaluation of current practice," Policy Research Working Paper Series 1071, The World Bank.
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    Cited by:
    1. Johan Almenberg & Artashes Karapetyan, 2010. "Mental accounting in the housing market," Working Paper 2010/20, Norges Bank.
    2. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and taxation: theory and evidence," Finance and Economics Discussion Series 2009-11, Board of Governors of the Federal Reserve System (U.S.).
    3. Shan, Hui, 2010. "Property taxes and elderly mobility," Journal of Urban Economics, Elsevier, vol. 67(2), pages 194-205, March.
    4. Joshua S. Gans & Andrew Leigh, 2006. "Born on the First of July: An (Un)natural Experiment in Birth Timing," CEPR Discussion Papers 529, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    5. Gilbert Metcalf & David Weisbach, 2008. "The Design of a Carbon Tax," Discussion Papers Series, Department of Economics, Tufts University 0728, Department of Economics, Tufts University.
    6. David Levinson & Andrew Odlyzko, 2007. "Too Expensive to Meter: The influence of transaction costs in transportation and communication," Working Papers 200802, University of Minnesota: Nexus Research Group, revised Feb 2007.
    7. Michael D. Grubb & Paul Oyer, 2008. "Who Benefits from Tax-Advantaged Employee Benefits?: Evidence from University Parking," NBER Working Papers 14062, National Bureau of Economic Research, Inc.

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