Salience And Taxation: Theory And Evidence

This paper presents evidence that consumer's under-react to taxes that are not salient and characterizes the welfare consequences of tax policies when agents make such optimization errors. The empirical evidence is based on two complementary strategies. First, the author conducted an experiment at a grocery store posting tax inclusive prices for 750 products subject to sales tax for a three week period. Scanner data shows that this intervention reduced demand for the treated products by 8 percent.