Salience and Taxation: Theory and Evidence

2009/08/01 by Raj Chetty, Adam Looney, Kory Kroft · 2,736 citations
Economics, Econometrics and Finance · Social Sciences · #Computer science #Consumption (sociology) #Econometrics #Economics #Fiscal Policy and Economic Growth #Gender, Labor, and Family Dynamics #Indirect tax #Market economy #Microeconomics #Public economics #Salience (neuroscience) #Salient #Statutory law #Tax incidence #Tax reform #Taxation and Compliance Studies #Welfare

paper · pdf · doi:10.1257/aer.99.4.1145

published in American Economic Review 99(4), 1145-1177 (American Economic Association)

openalex publication_date 2009/08/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/02

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)

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