Experimental Evidence on Tax Salience and Tax Incidence

Morone, Andrea and Nemore, Francesco and Nuzzo, Simone (2018): Experimental Evidence on Tax Salience and Tax Incidence.

Abstract

While a basic theoretical principle in public economics assumes that individuals optimize fully with respect to the introduction of a tax, a growing body of research is proving that several heuristics are in place when people take decisions. We re-examine the well-known Liability Side Equivalence principle in the light of the concept of salience. While these two topics have been extensively investigated in isolation, this paper innovates on the previous literature in that it focuses on their joint effects. Is tax incidence dependent on whether the subjects face a salient rather than a non-salient tax? Does the salience of a tax exert a different effect depending on who is legally committed to bear the tax burden? We address these questions through a laboratory experiment in which one unit of a fictitious good is being traded through a double-auction market institution. Based on a panel data analysis, our contribution shows that point of collection matter and determine the economic incidence of tax. Additionally we found that the joint effect of salience and statutory incidence does not alter the informative efficiency, but has a positive effect on buyers’ allocational efficiency when the tax is levied on sellers.

• 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; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D41 - Perfect Competition; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D44 - Auctions; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H22 - Incidence

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