NCPA - National Center for Policy Analysis

WHEN TAXPAYERS IGNORE LESS VISIBLE TAXES

February 19, 2008

Salience (or visibility) is quite important when analyzing tax policies because shoppers are inattentive to taxes, say the authors of a National Bureau of Economic Research Working Paper.

To prove this, the authors partnered with a supermarket chain to conduct an experiment in one of its stores:

  • For taxable items, like cosmetics and other non-food products, stores customarily do not include the sales tax in the price tags on the shelves, but rather have them rung up at the register, making them less salient to the consumer.
  • In the targeted store, the researchers adjusted the price tags to display prices including the 7.375 percent sales tax.
  • The result was a decline in sales of those items by 6 to 8 percent; reminding shoppers of the tax at the time of purchase made for more cautious consumers, suggesting that most of them do not normally take into account the sales tax on such products.

To complement this experimental evidence, the authors ran a second test using observational data over a longer time period and comparing the effect of price changes with tax changes:

  • Here they focused on alcohol consumption, because alcohol is subject to both the (salient) excise tax, which is included in the shelf price, and the less-salient sales tax that appears only at the cash register.
  • Looking at state-level changes between 1970 and 2003, the researchers found that the drop in consumption attributable to increases in the excise taxes was measurably larger than the reduction caused by the increases in sales taxes.
  • Thus, sales and excise taxes appear to induce different consumer behavior in both the short and the long run.

The finding that individuals optimize inaccurately -- even with respect to relatively simple sales taxes -- suggests that similar issues may arise in the analysis of a broad set of government policies, say the authors.

Source: Matt Nesvisky, "When Taxpayers Ignore Less Visible Taxes," NBER Digest, January 2008.

For text:

http://www.nber.org/digest/jan08/w13330.html 

For study:

http://www.nber.org/papers/w13330

 

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