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Salience and Taxation: Theory and Evidence

  • Looney, Adam
  • Kroft, Kory
  • Chetty, Raj

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.

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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 9748525.

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Date of creation: 2009
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Publication status: Published in American Economic Review
Handle: RePEc:hrv:faseco:9748525
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Web page: http://www.economics.harvard.edu/

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