Tax salience: an experimental investigation

MPRA Paper from University Library of Munich, Germany

Abstract: A basic principle in public finance is tax incidence equivalence (well known as Liability Side Equivalence Principle, LES). This principle holds that the burden of a unit tax on buyers and sellers is independent of who actually pays the tax. Moreover, economic theory assumes an individual behaviour model in which subjects act as if they have to fully optimize changes in tax policies by correctly processing information in their possession. However, a wide empirical literature focused on some psychological issues that have as yet not been considered theoretically. It is easy to assume that the introduction of tax-inclusive prices and tax-exclusive prices could lead to price misperception. This means that individuals could not perceive the exact burden of a tax when it is not salient (as it could be in the case of tax-exclusive prices). We conduct a laboratory experiment that attempts to answer two relevant questions: (1) Do subjects’ behaviour change with a less salient tax? (2) Is tax incidence independent of the responsibility to pay a more or less salient tax? Based on the results of Mann-Whitney U tests, concerning the first question we conclude that, in accordance to the theory of tax incidence, subjects’ behaviour is not affected by salience. On the other hand, concerning the second question, contrary to theoretical predictions, we report evidence of stark differences in average trading prices for LSE principle analysis. Most notably, we observe that tax-on-seller treatment prices are systematically higher, thus revealing a plausible tax-shifting phenomenon.

Keywords: Tax incidence; Tax salience; Liability Side Equivalence; choice behaviour; laboratory (search for similar items in EconPapers)
JEL-codes: C91 H2 H21 H30 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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