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Optimal Tax Salience

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  • Jacob Goldin

    (Princeton University and Yale Law School)

Abstract

Recent empirical work suggests that consumers systematically misperceive commod-ity taxes when the after-tax price is not prominent. I show how policymakers may utilize such low-salience taxes to enhance consumer welfare. The optimal combination of high-and low-salience taxes balances two competing welfare effects: low-salience taxes accommodate lower tax rates but induce consumers to misallocate their budgets. The efficiency gains from implementing the optimal policy are substantial, up to the entire deadweight loss from distortionary taxation. The surprising result that the optimal policy is to induce taxpayer mistakes can be readily understood as an application of the theory of the second-best.

Suggested Citation

  • Jacob Goldin, 2013. "Optimal Tax Salience," Working Papers 571a, Princeton University, Department of Economics, Industrial Relations Section..
    • Handle: RePEc:pri:indrel:571a
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    References listed on IDEAS

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    Cited by:

    1. Iñigo Iturbe-Ormaetxe, 2015. "Salience of social security contributions and employment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(5), pages 741-759, October.
    2. Benjamin B. Lockwood & Dmitry Taubinsky, 2017. "Regressive Sin Taxes," NBER Working Papers 23085, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Behavioral economics; Optimal taxation; Tax salience;
    All these keywords.

    JEL classification:

    • D19 - Microeconomics - - Household Behavior - - - Other
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • I00 - Health, Education, and Welfare - - General - - - General

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