Raising the Stakes: Experimental Evidence on the Robustness of Taxpayer Mistakes

Abstract

Recent evidence suggests consumers fail to account for taxes that are excluded from a good’s displayed price. What is less understood is whether and how such “salience effects” depend on the magnitude of the tax. Understanding how consumers’ responsiveness to a tax changes as the tax changes in magnitude is important for understanding whether such effects can be used by policymakers to reduce the tax’s deadweight loss and for shedding light on the underlying psychological model that explains why salience effects emerge. We conduct a laboratory shopping experiment with real stakes to study the effect of tax size on salience. Participants in the experiment receive an endowment of income to either spend or not spend, and choose whether to purchase various products under conditions designed to simulate a realistic online shopping experience. We experimentally vary whether taxes for the products are included in the prices that consumers see when they make their initial purchasing decisions (similar to a European-style value added tax), or whether instead taxes are added to the price only after the initial purchasing decision but before checkout (similar to a U.S.-style sales tax). We find no evidence that salience effects decline as the tax rate increases; we document a statistically significant salience effect at a tax rate that is considerably larger than the tax rates at which such effects have been previously documented. We utilize a simple theoretical framework to interpret the reduced form experimental results. Our results are more consistent with the hypothesis that higher taxes make consumers less attentive (at least for the range of taxes we consider). This result can be explained by a confirmation bias theory of salience: consumers tend to disregard information (like a tax) that does not align with their intention to purchase an item, and this lack of alignment increases in the size of the tax.

Details

Author(s):
  • Jacob Goldin
  • Naomi Feldman
  • Tatiana Homonoff
Publish Date:
June 1, 2018
Publication Title:
National Tax Journal
Format:
Journal Article Volume 71 Issue 2
Citation(s):
  • Naomi Feldman, Jacob Goldin & Tatiana Homonoff, Raising the Stakes: Experimental Evidence on the Robustness of Taxpayer Mistakes, 71 National Tax Journal 193 (2018).