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The impact of tax exclusive and inclusive prices on demand

  • Naomi E. Feldman
  • Bradley J. Ruffle

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 Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-50.

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Date of creation: 2012
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Handle: RePEc:fip:fedgfe:2012-50
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  1. 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.
  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," CESifo Working Paper Series 2194, CESifo Group Munich.
  3. Kalaycı, Kenan & Serra-Garcia, Marta, 2012. "Complexity and Biases," Discussion Papers in Economics 13035, University of Munich, Department of Economics.
  4. Richard Thaler, 1985. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 4(3), pages 199-214.
  5. 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.).
  6. Amy Finkelstein, 2007. "E-ZTax: Tax Salience and Tax Rates," NBER Working Papers 12924, National Bureau of Economic Research, Inc.
  7. Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
  8. Jacob Goldin & Tatiana Homonoff, 2010. "Smoke Gets in Your Eyes: Cigarette Tax Salience and Regressivity," Working Papers 1278, Princeton University, Department of Economics, Industrial Relations Section..
  9. KalaycI, Kenan & Potters, Jan, 2011. "Buyer confusion and market prices," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 14-22, January.
  10. Jacob Goldin, 2012. "Optimal Tax Salience," Working Papers 1385, Princeton University, Department of Economics, Industrial Relations Section..
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