Optimal Tax Salience

28 Pages Posted: 22 Feb 2012 Last revised: 11 Sep 2015

Date Written: August 21, 2015

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, Optimal Tax Salience (August 21, 2015). Journal of Public Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2009108 or http://dx.doi.org/10.2139/ssrn.2009108

Jacob Goldin (Contact Author)

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States

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