The Impact of Tax Exclusive and Inclusive Prices on Demand
Naomi E. Feldman
Federal Reserve Board
Bradley J. Ruffle
Ben-Gurion University of the Negev - Department of Economics; Wilfrid Laurier University - Department of Economics
August 6, 2012
We test the equivalence of tax-inclusive and tax-exclusive prices through a series of experiments that differ only in their handling of the tax. Subjects receive a cash budget and decide how much to keep and how much to spend on various attractively priced goods. Subjects spend significantly more when faced with tax-exclusive prices. This treatment effect is robust to different price levels, to initial shopping-cart purchases and persists throughout most of the ten rounds. A goods-level analysis, intra-round revisions as well as results from a third tax-deduction treatment all cast doubt on salience as the source of our findings.
Number of Pages in PDF File: 43
Keywords: experimental economics, sales tax, VAT, tax salience
JEL Classification: C91, H20, H31working papers series
Date posted: March 23, 2012 ; Last revised: August 7, 2012
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