Optimal tax salience

Jacob Goldin

Journal of Public Economics, 2015, vol. 131, issue C, 115-123

Abstract: Recent empirical work finds that consumers under-account for commodity taxes when the after-tax price is not prominent. I investigate how policymakers may utilize such “low-salience” taxes to promote welfare. The optimal combination of high- and low-salience taxes balances two competing effects: low-salience taxes dampen distortionary substitution but cause consumers to misallocate their budgets. Using a stylized model, I show the availability of taxes with differing salience provides an extra degree of freedom that can be used to implement the first-best welfare outcome. I characterize the optimal policy and derive a formula for incremental adjustments when the first-best is unattainable.

Keywords: Behavioral economics; Optimal taxation; Tax salience (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (31)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:131:y:2015:i:c:p:115-123

DOI: 10.1016/j.jpubeco.2015.09.005

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