Salience and Taxation: Theory and Evidence

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Salience and Taxation: Theory and Evidence

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Title: Salience and Taxation: Theory and Evidence
Author: Looney, Adam; Kroft, Kory; Chetty, Raj

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Citation: Chetty, Raj, Adam Looney, and Kory Kroft. 2009. Salience and taxation: theory and evidence. American Economic Review 99(4): 1145–1177.
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Abstract: 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.
Published Version: doi:10.1257/aer.99.4.1145
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