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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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