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Salience and Taxation: Theory and Evidence

Raj Chetty (), W. Looney and Kory Kroft

American Economic Review, 2009, vol. 99, issue 4, 1145-77

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. (JEL C93, D12, H25, H71)

JEL-codes: C93 D12 H25 H71 (search for similar items in EconPapers)
Date: 2009
Note: DOI: 10.1257/aer.99.4.1145
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Working Paper: Salience and taxation: theory and evidence (2009) Downloads
Working Paper: Salience and Taxation: Theory and Evidence (2009) Downloads
Working Paper: Salience and Taxation: Theory and Evidence (2007) Downloads
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