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The Impact of Tax Exclusive and Inclusive Prices on Demand

  • Bradley J. Ruffle

    ()

    (BGU)

  • Naomi E. Feldman

    ()

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

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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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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  1. Xavier Gabaix & David Laibson, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 505-540, May.
  2. 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.
  3. Richard Thaler, 1985. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 4(3), pages 199-214.
  4. Jacob Goldin, 2012. "Optimal Tax Salience," Working Papers 1385, Princeton University, Department of Economics, Industrial Relations Section..
  5. 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.
  6. Looney, Adam & Kroft, Kory & Chetty, Raj, 2009. "Salience and Taxation: Theory and Evidence," Scholarly Articles 9748525, Harvard University Department of Economics.
  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. KalaycI, Kenan & Potters, Jan, 2011. "Buyer confusion and market prices," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 14-22, January.
  9. 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.
  10. Kalaycı, Kenan & Serra-Garcia, Marta, 2012. "Complexity and Biases," Discussion Papers in Economics 13035, University of Munich, Department of Economics.
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