Sales Tax Not Included: Designing Commodity Taxes for Inattentive Consumers

By Goldin, Jacob | The Yale Law Journal, October 2012 | Go to article overview

Sales Tax Not Included: Designing Commodity Taxes for Inattentive Consumers


Goldin, Jacob, The Yale Law Journal


NOTE CONTENTS

INTRODUCTION

I. BACKGROUND CONCEPTS
     A. Tax Salience
     B. Efficiency Analysis and Tax Policy
     C. Low-Salience Taxes and Efficiency
        1. Efficiency Benefits of Low-Salience Taxation
        2. Efficiency Costs of Low-Salience Taxation

II. FINE-TUNING TAX SALIENCE
     A. Identifying the Efficient Degree of Tax Salience
     B. Combining High- and Low-Salience Taxes To Implement the
        Efficient Degree of Tax Salience
     C. Challenges to Implementing the Efficient Degree of Tax Salience
        1. The Efficient Degree of Tax Salience Might Be Outside the
           Range of Available Tax Instruments
        2. Changing Attentiveness to Low-Salience Taxes
        3. Taxpayer Learning

III. TAX SALIENCE AND OTHER SOCIAL GOALS
     A. Corrective Taxes
     B. Distributional Effects of Tax Salience
     C. Psychic Costs Associated with Low-Salience Taxes
     D. The Democratic Legitimacy of Implementing [theta] *

CONCLUSION

APPENDIX

INTRODUCTION

With the advent of behavioral economics, scholars have begun to grasp the complexity of forces that drive individual decisionmaldng. A large body of research suggests that even small changes in a policy's design can dramatically affect how individuals behave in response to the policy, even when those design changes do not alter the incentives that individuals face. (1) Armed with this insight, prominent academics and policymakers have argued that governments should take such "behavioral" patterns into account when designing policy. (2)

This Note applies the insights of behavioral economics to an understudied area: the design of tax policy. (3) A series of recent studies suggests that, contrary to the assumptions of conventional tax analysis, the design of a tax significantly shapes taxpayer decisionmaking. These studies find that the more salient a tax is--that is, the more prominent a taxed good's after-tax price--the more consumers take the tax into account when making their purchasing decisions. The lower the salience of a tax, the less taxpayers pay attention and hence, the less they respond to changes in the tax's amount.

In this Note, I argue that the empirical evidence on tax salience has important implications for the design of tax policy. Manipulating the salience of a tax does not affect the substantive choices available to consumers--the salience of the tax does not affect a good's real after-tax price. But because salience affects individuals' consumption decisions, policymakers can manipulate this dimension of tax design to better control the effects of the taxes they impose. Put differently, my claim is that tax salience provides a new design lever that policymakers should use to promote efficiency and other social goals.

The recognition that policymakers should consider salience when setting tax policy is certainly important, but on its own it is not that useful. The challenge for policymaking lies in the next step: determining how salient a particular tax should be. Should taxes be fully salient, entirely hidden, or somewhere in between? And how should governments choose between these possibilities?

Whereas previous scholarship has focused on the binary choice between relying on high-salience versus low-salience taxes, (4) governments are not typically constrained to act in this all-or-nothing manner. Rather, policymakers may employ a combination of high- and low-salience taxes, with a different fraction of each being levied for every taxed good. To illustrate, consider the case of commodity taxation, where a central determinant of salience is whether the tax-inclusive price of a good is prominent at the time consumers make their purchasing decisions. The salience research suggests that consumers are more responsive to posted taxes--taxes that are included in a good's posted price--than to equally sized register taxes--taxes that are added when the consumer checks out at the register. …

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