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Optimal tax salience

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  • Goldin, Jacob

Abstract

Recent empirical work finds that consumers under-account for commodity taxes when the after-tax price is not prominent. I investigate how policymakers may utilize such “low-salience” taxes to promote welfare. The optimal combination of high- and low-salience taxes balances two competing effects: low-salience taxes dampen distortionary substitution but cause consumers to misallocate their budgets. Using a stylized model, I show the availability of taxes with differing salience provides an extra degree of freedom that can be used to implement the first-best welfare outcome. I characterize the optimal policy and derive a formula for incremental adjustments when the first-best is unattainable.

Suggested Citation

  • Goldin, Jacob, 2015. "Optimal tax salience," Journal of Public Economics, Elsevier, vol. 131(C), pages 115-123.
    • Handle: RePEc:eee:pubeco:v:131:y:2015:i:c:p:115-123
    DOI: 10.1016/j.jpubeco.2015.09.005
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    References listed on IDEAS

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    3. Michaël Sicsic, 2022. "Does labour income react more to income tax or means‐tested benefits reforms?," Fiscal Studies, John Wiley & Sons, vol. 43(3), pages 291-319, September.
    4. Zunian Luo, 2022. "Cap or No Cap? What Can Governments Do to Promote EV Sales?," Papers 2212.08137, arXiv.org.
    5. Johannes Becker & Jonas Fooken & Melanie Steinhoff, 2019. "Behavioral Effects of Withholding Taxes on Labor Supply," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(4), pages 1417-1440, October.
    6. Samuele Murtinu & Giulio Piccirilli & Agnese Sacchi, 2022. "Rational inattention and politics: how parties use fiscal policies to manipulate voters," Public Choice, Springer, vol. 190(3), pages 365-386, March.
    7. Sebastien Bradley & Naomi E. Feldman, 2020. "Hidden Baggage: Behavioral Responses to Changes in Airline Ticket Tax Disclosure," American Economic Journal: Economic Policy, American Economic Association, vol. 12(4), pages 58-87, November.
    8. Alex Rees-Jones & Dmitry Taubinsky, 2018. "Taxing Humans: Pitfalls of the Mechanism Design Approach and Potential Resolutions," Tax Policy and the Economy, University of Chicago Press, vol. 32(1), pages 107-133.
    9. Cerruti, Davide & Daminato, Claudio & Filippini, Massimo, 2023. "The impact of policy awareness: Evidence from vehicle choices response to fiscal incentives," Journal of Public Economics, Elsevier, vol. 226(C).
    10. Bierbrauer Felix J., 2016. "Effizienz oder Gerechtigkeit?: Ungleiche Einkommen, ungleiche Vermögen und Optimale Steuern," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 17(1), pages 2-24, April.
    11. Felix Bierbrauer, 2016. "Effizienz oder Gerechtigkeit? Ungleiche Einkommen, ungleiche Vermögen und die Theorie der optimalen Besteuerung," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2016_03, Max Planck Institute for Research on Collective Goods.
    12. Enda Patrick Hargaden & Andrew Hanson & Matthew Harris, 2023. "The Optimal Taxation of Network Goods," Working Papers 2023-01, University of Tennessee, Department of Economics.
    13. Dmitry Taubinsky & Alex Rees-Jones, 2018. "Attention Variation and Welfare: Theory and Evidence from a Tax Salience Experiment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(4), pages 2462-2496.
    14. Jessica H. Brown, 2022. "The tradeoff between knowledge of mandated benefits and moral hazard," Southern Economic Journal, John Wiley & Sons, vol. 88(3), pages 1037-1064, January.
    15. Peter Spittal, 2022. "Benefit Salience and Labour Supply," Bristol Economics Discussion Papers 22/764, School of Economics, University of Bristol, UK.
    16. Bizzarri, Matteo & d’Arienzo, Daniele, 2024. "The social value of overreaction to information," Journal of Mathematical Economics, Elsevier, vol. 115(C).
    17. Tatiana A. Homonoff, 2018. "Can Small Incentives Have Large Effects? The Impact of Taxes versus Bonuses on Disposable Bag Use," American Economic Journal: Economic Policy, American Economic Association, vol. 10(4), pages 177-210, November.
    18. Moore, Dylan T. & Slemrod, Joel, 2021. "Optimal tax systems with endogenous behavioral biases," Journal of Public Economics, Elsevier, vol. 197(C).
    19. Luo, Zunian, 2021. "Cap or no cap? What can governments do to promote EV sales?," MPRA Paper 113566, University Library of Munich, Germany.
    20. Joan Vilá, 2019. "Respuestas en los ingresos frente a un programa de transferencias monetarias: evidencia de un notch a partir de registros administrativos de Uruguay," Documentos de Trabajo (working papers) 19-07, Instituto de Economía - IECON.
    21. Bradley, Sebastien, 2018. "Assessment limits and timing of real estate transactions," Regional Science and Urban Economics, Elsevier, vol. 70(C), pages 360-372.
    22. Nyman, Pär & Aggeborn, Linuz & Ahlskog, Rafael, 2023. "Filling in the blanks: How does information about the Swedish EITC affect labour supply?," Labour Economics, Elsevier, vol. 85(C).
    23. Lu, Kelin, 2022. "Overreaction to capital taxation in saving decisions," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    24. Louis Kaplow, 2022. "Optimal Income Taxation," NBER Working Papers 30199, National Bureau of Economic Research, Inc.
    25. Sarah E. Larson & Bruce D. McDonald, 2023. "Taxation and citizen choice: The effect of a county charter on property taxes," Public Budgeting & Finance, Wiley Blackwell, vol. 43(1), pages 64-84, March.

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