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The impact of tax exclusive and inclusive prices on demand

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  • Naomi E. Feldman
  • Bradley J. Ruffle

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.

Suggested Citation

  • Naomi E. Feldman & Bradley J. Ruffle, 2012. "The impact of tax exclusive and inclusive prices on demand," Finance and Economics Discussion Series 2012-50, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2012-50
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    References listed on IDEAS

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    1. 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.
    2. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-1177, September.
    3. Kenan Kalaycı & Marta Serra-Garcia, 2016. "Complexity and biases," Experimental Economics, Springer;Economic Science Association, vol. 19(1), pages 31-50, March.
    4. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters,in: Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74 Edward Elgar Publishing.
    5. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    6. 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.
    7. Amy Finkelstein, 2009. "E-ztax: Tax Salience and Tax Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 124(3), pages 969-1010.
    8. 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 302-336, February.
    9. Jacob Goldin, 2012. "Optimal Tax Salience," Working Papers 1385, Princeton University, Department of Economics, Industrial Relations Section..
    10. KalaycI, Kenan & Potters, Jan, 2011. "Buyer confusion and market prices," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 14-22, January.
    11. repec:pri:indrel:goldin%20-%20optimal%20tax%20salience.pdf is not listed on IDEAS
    12. repec:pri:indrel:goldin%20-%20optimal%20tax%20salience is not listed on IDEAS
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    Citations

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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. Fochmann, Martin & Hemmerich, Kristina, 2014. "Real tax effects and tax perception effects in decisions on asset allocation," arqus Discussion Papers in Quantitative Tax Research 156, arqus - Arbeitskreis Quantitative Steuerlehre.
    3. Richard M. Bird, 2014. "Foreign advice and tax policy in developing countries," Chapters,in: Taxation and Development: The Weakest Link?, chapter 4, pages 103-144 Edward Elgar Publishing.
    4. Abeler, Johannes & Jäger, Simon, 2013. "Complex Tax Incentives: An Experimental Investigation," IZA Discussion Papers 7373, Institute for the Study of Labor (IZA).
    5. Rebecca K Scott, 2014. "Tax Salience vs. Price Uncertainty: Disentangling the Effects of Attention and Rational Habits," Economics Series Working Papers 736, University of Oxford, Department of Economics.
    6. Hagen Ackermann & Martin Fochmann & Nadja Wolf, 2016. "The Effect of Straight-Line and Accelerated Depreciation Rules on Risky Investment Decisions—An Experimental Study," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 4(4), pages 1-26, October.
    7. Tomer Blumkin & Haim Pinhas & Ro'i Zultan, 2017. "Leveraging Wage Subsidies to Facilitate Fair Wages and Increase Social Welfare," CESifo Working Paper Series 6597, CESifo Group Munich.

    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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