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The Simple Economics of Salience and Taxation

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  • Raj Chetty

Abstract

This paper derives empirically implementable formulas for the incidence and efficiency costs of taxation that account for tax salience effects as well as other optimization errors. Contrary to conventional wisdom, the formulas imply that the economic incidence of a tax depends on its statutory incidence and that a tax can create deadweight loss even if it induces no change in demand. The results are derived using simple supply and demand diagrams and familiar notions of consumer and producer surplus. The approach to welfare analysis proposed here yields robust formulas because it does not require specification of a positive theory for why agents fail to optimize with respect to tax policies.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15246.

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Date of creation: Aug 2009
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Handle: RePEc:nbr:nberwo:15246

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  1. Gallagher, Kelly Sims & Muehlegger, Erich, 2008. "Giving Green to Get Green: Incentives and Consumer Adoption of Hybrid Vehicle Technology," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp08-009, Harvard University, John F. Kennedy School of Government.
  2. Raj Chetty & Emmanuel Saez, 2009. "Teaching the Tax Code: Earnings Responses to an Experiment with EITC Recipients," NBER Working Papers 14836, National Bureau of Economic Research, Inc.
  3. Kotlikoff, Laurence J. & Summers, Lawrence H., 1987. "Tax incidence," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 16, pages 1043-1092 Elsevier.
  4. Hausman, Jerry A & Newey, Whitney K, 1995. "Nonparametric Estimation of Exact Consumers Surplus and Deadweight Loss," Econometrica, Econometric Society, Econometric Society, vol. 63(6), pages 1445-76, November.
  5. Slemrod, Joel, 2006. "The Role of Misconceptions in Support for Regressive Tax Reform," National Tax Journal, National Tax Association, vol. 59(1), pages 57-75, March.
  6. Tomer Blumkin & Bradley J. Ruffle & Yosef Ganun, 2008. "Are Income and Consumption Taxes Ever Really Equivalent? Evidence from a Real-Effort Experiment with Real Goods," Working Papers, Ben-Gurion University of the Negev, Department of Economics 0801, Ben-Gurion University of the Negev, Department of Economics.
  7. Auerbach, Alan J., 1985. "The theory of excess burden and optimal taxation," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 2, pages 61-127 Elsevier.
  8. B. Douglas Bernheim & Antonio Rangel, 2009. "Beyond Revealed Preference: Choice-Theoretic Foundations for Behavioral Welfare Economics-super-," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 124(1), pages 51-104, February.
  9. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 6(1-2), pages 55-75.
  10. Chetty, Nadarajan, 2009. "Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods," Scholarly Articles 9748528, Harvard University Department of Economics.
  11. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and taxation: theory and evidence," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2009-11, Board of Governors of the Federal Reserve System (U.S.).
  12. de Bartolome, Charles A.M., 1991. "Which Tax Rate Do People Use: Average or Marginal?," Working Papers, C.V. Starr Center for Applied Economics, New York University 91-49, C.V. Starr Center for Applied Economics, New York University.
  13. Raj Chetty, 2006. "A New Method of Estimating Risk Aversion," American Economic Review, American Economic Association, American Economic Association, vol. 96(5), pages 1821-1834, December.
  14. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-72, June.
  15. Rudolf Kerschbamer & Georg Kirchsteiger, 2000. "Theoretically robust but empirically invalid? An experimental investigation into tax equivalence," Economic Theory, Springer, Springer, vol. 16(3), pages 719-734.
  16. Douglas Bernheim & Antonio Rangel, 2007. "Beyond Revealed Preference Choice Theoretic Foundations for Behavioral Welfare Economics," Discussion Papers, Stanford Institute for Economic Policy Research 07-031, Stanford Institute for Economic Policy Research.
  17. Xavier Gabaix & David Laibson, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 121(2), pages 505-540, May.
  18. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, American Economic Association, vol. 77(1), pages 11-23, March.
  19. Green, Jerry & Hojman, Daniel, 2007. "Choice, Rationality and Welfare Measurement," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp07-054, Harvard University, John F. Kennedy School of Government.
  20. Naomi E. Feldman & Peter Katuscak, 2006. "Should the Average Tax Rate Be Marginalized?," CERGE-EI Working Papers wp304, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
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Cited by:
  1. David Card & Alexandre Mas & Enrico Moretti & Emmanuel Saez, 2012. "Inequality at Work: The Effect of Peer Salaries on Job Satisfaction," American Economic Review, American Economic Association, American Economic Association, vol. 102(6), pages 2981-3003, October.
  2. Nicola Lacetera & Devin G. Pope & Justin R. Sydnor, 2011. "Heuristic Thinking and Limited Attention in the Car Market," NBER Working Papers 17030, National Bureau of Economic Research, Inc.
  3. Abeler, Johannes & Jäger, Simon, 2013. "Complex Tax Incentives: An Experimental Investigation," IZA Discussion Papers 7373, Institute for the Study of Labor (IZA).
  4. Raj Chetty & Adam Looney & Kory Kroft, 2007. "Salience and Taxation: Theory and Evidence," NBER Working Papers 13330, National Bureau of Economic Research, Inc.
  5. Martin Altemeyer-Bartscher, 2014. "Fiscal Equalization, Tax Salience, and Tax Competition," IWH Discussion Papers, Halle Institute for Economic Research 3, Halle Institute for Economic Research.
  6. Kniesner, Thomas J. & Viscusi, W. Kip & Ziliak, James P., 2009. "Policy Relevant Heterogeneity in the Value of Statistical Life: New Evidence from Panel Data Quantile Regressions," IZA Discussion Papers 4508, Institute for the Study of Labor (IZA).
  7. Iñigo Iturbe-Ormaetxe Kortajarene, 2011. "Visibility of social security contributions and employment," Working Papers. Serie AD, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 2011-16, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  8. Elinder, Mikael & Persson, Lovisa, 2014. "Property Taxation, Bounded Rationality and House Prices," Working Paper Series, Research Institute of Industrial Economics 1029, Research Institute of Industrial Economics.
  9. Burman, Leonard E. & Coe, Norma B. & Dworsky, Michael & Gale, William G., 2012. "Effects Of Public Policies On The Disposition Of Pre-Retirement Lump-Sum Distributions: Rational And Behavioral Influences," National Tax Journal, National Tax Association, vol. 65(4), pages 863-87, December.
  10. William F. Fox & Matthew Murray, 2013. "Taxing the Small: Fostering Tax Compliance Among Small Enterprises in Developing Countries," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1310, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  11. Ekaterina Rhodes & Mark Jaccard, 2013. "A Tale of Two Climate Policies: Political Economy of British Columbia's Carbon Tax and Clean Electricity Standard," Canadian Public Policy, University of Toronto Press, vol. 39(s2), pages 37-52, August.

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