IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Salience and Taxation: Theory and Evidence

  • Raj Chetty
  • Adam Looney
  • Kory Kroft

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. (JEL C93, D12, H25, H71)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1145
Download Restriction: no

File URL: http://www.aeaweb.org/aer/data/sept09/20071103_data.zip
Download Restriction: no

File URL: http://www.aeaweb.org/aer/data/sept09/20071103_app.pdf
Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 99 (2009)
Issue (Month): 4 (September)
Pages: 1145-77

as
in new window

Handle: RePEc:aea:aecrev:v:99:y:2009:i:4:p:1145-77
Note: DOI: 10.1257/aer.99.4.1145
Contact details of provider: Web page: https://www.aeaweb.org/aer/
Email:


More information through EDIRC

Order Information: Web: https://www.aeaweb.org/subscribe.html

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. S. Dellavigna., 2011. "Psychology and Economics: Evidence from the Field," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 5.
  2. Reis, Ricardo, 2005. "Inattentive Consumers," CEPR Discussion Papers 5053, C.E.P.R. Discussion Papers.
  3. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002. "How Much Should We Trust Differences-in-Differences Estimates?," NBER Working Papers 8841, National Bureau of Economic Research, Inc.
  4. Mirko Wiederholt & Bartosz Mackowiak, 2005. "Optimal Sticky Prices under Rational Inattention," 2005 Meeting Papers 369, Society for Economic Dynamics.
  5. Manuel Amador & Ivan Werning & George-Marios Angeletos, 2003. "Commitment Vs. Flexibility," NBER Working Papers 10151, National Bureau of Economic Research, Inc.
  6. de Bartolome, Charles A.M., 1991. "Which Tax Rate Do People Use: Average or Marginal?," Working Papers 91-49, C.V. Starr Center for Applied Economics, New York University.
  7. A. J. Auerbach & M. Feldstein (ed.), 1985. "Handbook of Public Economics," Handbook of Public Economics, Elsevier, edition 1, volume 1, number 1.
  8. Glenn Ellison & Sara Fisher Ellison, 2009. "Search, Obfuscation, and Price Elasticities on the Internet," Econometrica, Econometric Society, vol. 77(2), pages 427-452, 03.
  9. 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 0801, Ben-Gurion University of the Negev, Department of Economics.
  10. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
  11. Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, vol. 84(1), pages 1-32, April.
  12. Rudolf Kerschbamer & Georg Kirchsteiger, 2000. "Theoretically robust but empirically invalid? An experimental investigation into tax equivalence," Economic Theory, Springer, vol. 16(3), pages 719-734.
  13. Stefano DellaVigna & Joshua M. Pollet, 2005. "Attention, Demographics, and the Stock Market," NBER Working Papers 11211, National Bureau of Economic Research, Inc.
  14. 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 - Economics Institute, Prague.
  15. Krishna, Aradhna & Slemrod, Joel, 2003. "Behavioral Public Finance: Tax Design As Price Presentation," International Tax and Public Finance, Springer, vol. 10(2), pages 189-203, March.
  16. Hausman, Jerry A & Joskow, Paul L, 1982. "Evaluating the Costs and Benefits of Appliance Efficiency Standards," American Economic Review, American Economic Association, vol. 72(2), pages 220-25, May.
  17. Alan J. Auerbach, 1982. "The Theory of Excess Burden and Optimal Taxation," NBER Working Papers 1025, National Bureau of Economic Research, Inc.
  18. Douglas Bernheim & Antonio Rangel, 2007. "Beyond Revealed Preference Choice Theoretic Foundations for Behavioral Welfare Economics," Discussion Papers 07-031, Stanford Institute for Economic Policy Research.
  19. Austan Goolsbee, 1997. "What Happens When You Tax the Rich? Evidence from Executive Compensation," NBER Working Papers 6333, National Bureau of Economic Research, Inc.
  20. Davis, Steven J. & Henrekson, Magnus, 2006. "Economic Performance and Work Activity in Sweden affter the Crisis of the early 1990s," SSE/EFI Working Paper Series in Economics and Finance 647, Stockholm School of Economics, revised 12 Dec 2006.
  21. Raj Chetty, 2009. "The Simple Economics of Salience and Taxation," NBER Working Papers 15246, National Bureau of Economic Research, Inc.
  22. Edward C. Prescott, 2004. "Why do Americans work so much more than Europeans?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Jul, pages 2-13.
  23. Emmanuel Saez, 2004. "Reported Incomes and Marginal Tax Rates, 1960-2000: Evidence and Policy Implications," NBER Working Papers 10273, National Bureau of Economic Research, Inc.
  24. Shafir, Eldar & Diamond, Peter & Tversky, Amos, 1997. "Money Illusion," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 341-74, May.
  25. Amy Finkelstein, 2009. "E-ZTAX: Tax Salience and Tax Rates," The Quarterly Journal of Economics, MIT Press, vol. 124(3), pages 969-1010, August.
  26. Feldstein, Martin S, 1985. "The Optimal Level of Social Security Benefits," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 303-20, May.
  27. O'Donoghue, Ted & Rabin, Matthew, 2006. "Optimal sin taxes," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1825-1849, November.
  28. Feldstein, Martin, 1995. "Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Scholarly Articles 2766676, Harvard University Department of Economics.
  29. Hossain Tanjim & Morgan John, 2006. "...Plus Shipping and Handling: Revenue (Non) Equivalence in Field Experiments on eBay," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(2), pages 1-30, January.
  30. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  31. Gourville, John T, 1998. " Pennies-a-Day: The Effect of Temporal Reframing on Transaction Evaluation," Journal of Consumer Research, University of Chicago Press, vol. 24(4), pages 395-408, March.
  32. Fujii, Edwin T & Hawley, Clifford B, 1988. "On the Accuracy of Tax Perceptions," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 344-47, May.
  33. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-41, June.
  34. Raj Chetty, 2003. "A New Method of Estimating Risk Aversion," NBER Working Papers 9988, National Bureau of Economic Research, Inc.
  35. Sendhil Mullainathan, 2002. "A Memory-Based Model Of Bounded Rationality," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 735-774, August.
  36. Philip J. Cook & Jan Ostermann & Frank A. Sloan, 2005. "Are Alcohol Excise Taxes Good For Us? Short and Long-Term Effects on Mortality Rates," NBER Working Papers 11138, National Bureau of Economic Research, Inc.
  37. Looney, Adam & Kroft, Kory & Chetty, Raj, 2009. "Salience and Taxation: Theory and Evidence," Scholarly Articles 9748525, Harvard University Department of Economics.
  38. Laurence J. Kotlikoff & Lawrence H. Summers, 1986. "Tax Incidence," NBER Working Papers 1864, National Bureau of Economic Research, Inc.
    • Kotlikoff, Laurence J. & Summers, Lawrence H., 1987. "Tax incidence," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 16, pages 1043-1092 Elsevier.
  39. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
  40. Cecilia Chaing & Lindsay McSweeney, 2010. "A Behavioral Model of Rational Choice," CPI Journal, Competition Policy International, vol. 6.
  41. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
  42. Laibson, David I. & Gabaix, Xavier, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Scholarly Articles 4554333, Harvard University Department of Economics.
  43. Jennifer Brown & Tanjim Hossain & John Morgan, 2010. "Shrouded Attributes and Information Suppression: Evidence from the Field," The Quarterly Journal of Economics, MIT Press, vol. 125(2), pages 859-876, May.
  44. Eytan Sheshinski, 2000. "Bounded Rationality and Socially Optimal Limits on Choice in a Self-Selection Model," Discussion Paper Series dp330, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem, revised Nov 2002.
  45. Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, vol. 75(4), pages 708-20, September.
  46. Meghan Busse & Jorge Silva-Risso & Florian Zettelmeyer, 2006. "$1,000 Cash Back: The Pass-Through of Auto Manufacturer Promotions," American Economic Review, American Economic Association, vol. 96(4), pages 1253-1270, September.
  47. Conlisk, John, 1988. "Optimization cost," Journal of Economic Behavior & Organization, Elsevier, vol. 9(3), pages 213-228, April.
  48. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-72, June.
  49. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
  50. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  51. Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 529-38, May.
  52. Eric Anderson & Duncan Simester, 2003. "Effects of $9 Price Endings on Retail Sales: Evidence from Field Experiments," Quantitative Marketing and Economics, Springer, vol. 1(1), pages 93-110, March.
  53. Rosen, Harvey S, 1976. "Taxes in a Labor Supply Model with Joint Wage-Hours Determination," Econometrica, Econometric Society, vol. 44(3), pages 485-507, May.
  54. Xavier Gabaix & David Laibson & Guillermo Moloche & Stephen Weinberg, 2006. "Costly Information Acquisition: Experimental Analysis of a Boundedly Rational Model," American Economic Review, American Economic Association, vol. 96(4), pages 1043-1068, September.
  55. Jonathan Gruber & Botond Köszegi, 2001. "Is Addiction "Rational"? Theory And Evidence," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1261-1303, November.
  56. 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.
Full references (including those not matched with items on IDEAS)

This item is featured on the following reading lists or Wikipedia pages:

  1. Raj Chetty in Wikipedia German ne '')
  2. Salience and Taxation: Theory and Evidence (AER 2009) in ReplicationWiki

When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:99:y:2009:i:4:p:1145-77. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros)

or (Michael P. Albert)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.