Experimental Evidence on Tax Salience and Tax Incidence

Morone, Andrea and Nemore, Francesco and Nuzzo, Simone (2016): Experimental Evidence on Tax Salience and Tax Incidence.

Abstract

While a basic theoretical principle in public economics assumes that individuals’ behaviour is fully-optimizer with respect to the introduction of a tax, an increasing body of research is presenting evidence that agents decision making is often affected by non-negligible cognitive biases, which could be responsible for lower market performance as well as for deviations from standard theoretical predictions. This paper extends the latter strand of research focusing on two trend topics in public economics: tax salience and tax incidence. While the former refers to the prominence of the tax, the latter places emphasis on the statutory vs. factual division of tax payments. Is market performance affected by the salience of the tax? Is the incidence of a tax independent of which side of the market it is levied on (Liability Side Equivalence Principle, LES)? We address these questions through a laboratory experiment in which one unit of a fictitious good is traded through a double-auction market institution. Based on a panel data analysis, our contribution shows that a non-salient tax reduces both the allocational and informational efficiency of the market with respect to the instance in which the tax is salient. Moreover, we show that the Liability Side Equivalence Principle does not hold in practice.

• Item Type: MPRA Paper
• Language: English
• Keywords: Tax incidence, Tax salience, Liability Side Equivalence, choice behaviour, laboratory.
• Subjects: C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior; H - Public Economics > H2 - Taxation, Subsidies, and Revenue; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H30 - General

References

Ashenfelter, O. and D. Sullivan, (1987). “Nonparametric tests of market structure: An application to the cigarette industry” Journal of Industrial Economics, 35(4): 483-498.

Biswas, A., E. J. Wilson and J. W. Licata (1993). “Reference Pricing Studies in Marketing: A Synthesis of Research Results”, Journal of Business Research 27(3), 239–256.

Boylan, S. J. and P. J. Frischmann (2006). “Experimental Evidence on the Role of Tax Complexity in Investment Decisions”, Journal of the American Taxation Association 28, 69–88.

Chetty, R., A. Looney, K. Kroft (2009). “Salience and taxation: theory and evidence” The American Economic Review, 99(4): 1145-1177.

Cox, J. C., M. Rider, and A. Sen (2012). “Tax incidence: Do institutions matter? An experimental study”. Experimental Economics Center Working Paper Series No 2012-17.

De Bartolome, C. A. de (1995). “Which tax rate do people use: Average or marginal?”, Journal of Public Economics 56, 79–96.

DellaVigna, S. (2007). “Psychology and Economics: evidence from the field” UC-Berkeley Working Paper.

Fishbacher, U. (2007). “z-tree: Zurich toolbox for ready-made economic experiments”, Experimetal Economics, 10(2), 171-178.

Fuji, E.T. and C.B. Hawley (1988). “On the accuracy of tax perceptions”, Review of Economics & Statistics, 70, 344-347.

Fullerton, D. and Metcalf, G. (2002). “Tax incidence.” Handbook of Public Economics, volume 4. A. Auerbach and M. Feldstein, eds., (Amsterdam: Elsevier): 1787-1872.

Gensemer, B.L., J.A. Lean and W.B. Neenan (1965). “Awareness of marginal income tax rates among high-income taxpayers”, National Tax Journal, 18, 258-267.

Gode, D.K. and S. Sunder (1997). “What makes markets allocationally efficient?”, The Quarterly Journal of Economics, Vol. 112, No. 2, May 1997.

Hanson, A. and R. Sullivan, (2009). “The incidence of tobacco taxation: evidence from geographic micro-level data” National Tax Journal, 62(4): 677-698.

Harris, J.E., (1987). “The 1983 increase in the federal cigarette excise tax” in Tax Policy and the Economy, 87-111. Lawrence H. Summers (ed.), MIT Press: Cambridge, MA.

Keeler, T.E., T. Hu, P.G. Barnett, W.G. Manning, H. Sung, (1996). “Do cigarette producers price-discriminate by state?” An empirical analysis of local cigarette pricing and taxation”, Journal of Health Economics, 15(4): 499-512.

Kerschbamer, R. and G. Kirchsteiger (2000). “Theoretically robust but empirically invalid? An experimental investigation into tax equivalence”, Economic Theory, 16, 719-734.

Krishna, A., R. Briesch, D. Lehmann and H. Yuan (2002). “A Meta-Analysis of the Effect of Price Presentation on Deal Evaluation”, Journal of Retailing 78(2), 101–118.

Levin, I. P., S. L. Schneider and G. J. Gaeth (1998). “All Frames Are Not Created Equal: A Typology and Critical Analysis of Framing Effects”, Organizational Behavior and Human Decision Processes 76(2), 149–188.

McCaffery, E.J. and J. Baron (2006). “Thinking about tax”, Psychology, Public Policy & Law, 12(1): 106-35.

Mill, J.S. (1848) “Principle of political economy. With some of their applications to social philosophy”, London.

Morgan, J.N., R.F. Dye and J.H. Hybels (1977). “Results from two national surveys of philanthropic activity” in: Commission on private philanthropy and public needs (ed.): research papers Volume I: History, trends and current magnitudes, 157-324.

Rosen, H. S. (1976). “Taxes in a labor supply model with joint wage-hours determination”, Econometrica 44, 485–507.

Ruffle, B.J. (2005). “Tax and subsidy incidence equivalence theories: experimental evidence from competitive markets. The experimental approaches to public economics”, Journal of Public Economics, 89, 1519-1542.

Rupert, T. J., L. E. Single and A. M. Wright (2003). “The Impact of Floors and Phase-Outs on Taxpayers' Decisions and Understanding of Marginal Tax Rates”, Journal of the American Taxation Association 25, 72–86.

Rupert, T.J. and C.M. Fischer (1995). “An empirical investigation of taxpayer awareness of marginal tax rates”, Journal of the American Taxation Association, 17, 36-59.

Sausgruber, R. and J.R. Tyran (2005). “Testing the Mill hypothesis of fiscal illusion”, Public Choice, 122, 39-68.

Simon, H. (1955). “A behavioral model of rational choice”, Quarterly Journal of Economics, 691(1): 99-118.

Smirnov, N.V. (1936). “Estimate of deviation between empirical distribution functions in two independent samples (Russian),” Bulletin of Moscow State University 2: 3-16.

Smith, V. L. (1982). “Microeconomic system as an experimental science”, American Economic Review, 72, 923-955.

Smith, V.L. (1962). “An experimental study of competitive market behavior,” Journal of Political Economy 70, 111-37.