Sales Tax Not Included: Designing Commodity Taxes for Inattentive Consumers
44 Pages Posted: 4 Nov 2012
Date Written: November 4, 2012
A spate of new research suggests that the salience of a tax dramatically shapes taxpayer behavior: the more salient a tax — i.e., the more prominent a good’s after-tax price — the more taxpayers respond. Policymakers make decisions about tax salience, whether they intend to or not, every time they impose a new tax, yet the normative implications of those decisions remain poorly understood. This note derives new guidelines for how policymakers can manipulate tax salience to promote efficiency. In particular, I show how levying a combination of high- and low-salience taxes can raise consumer welfare and further other social goals.
Keywords: commodity taxation, tax salience
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