salience and taxation: theory and evidence raj chetty adam looney and kory kroft

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Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

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Page 1: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

Salience and Taxation:Theory and Evidence

Raj Chetty

Adam Looney

and Kory Kroft

Page 2: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

What is “salience”?

• 在淘宝上的一个同城店铺买一个鼠标• A 标价 60元,但需要支付邮费。• B标价 65元免邮费。• 你会选择那一种?

• We use “tax salience” to refer to the visibility of the tax-inclusive price.

Page 3: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

Why does “salience” matter?

• A central assumption in public economics is that agents optimize fully with respect to tax policies.– agents respond to tax changes in the same way as

price changes

• Individuals are inattentive to some types of incentives.– tax systems are complex and nontransparent in

practice.

Page 4: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

The paper

• Find some evidence of salience effects– Field experiment in a grocery

– Observational data on alcohol sales

• Develop a theoretical framework for welfare analysis

Page 5: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

Outline

• Evidence from an Experiment at a Grocery Store

• Evidence from Observational Data on Alcohol Sales

• Welfare Analysis

• Conclusion

Page 6: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

Empirical Framework

Page 7: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

• two goods, x and y, supplied perfectly elastically

• Normalize the price of y to one and let p denote the pretax price of x.

• y is untaxed and x is subject to an ad valorem sales tax τ S (价外税)

• The price that consumers see when deciding what to purchase is p.

• the tax-inclusive price q is less “salient” than the pretax price p.

Page 8: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

• In the neoclassical full-optimization model, demand depends only on the total tax-inclusive price

• Salience effect

Page 9: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

• Test

Page 10: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

Two strategies

• Manipulate Tax Salience---------filed experiment

• Manipulate Tax Rate---------------observational data

Page 11: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

Evidence From An Experiment At A Grocery Store

Page 12: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

Background and Design

• Sales tax is less salience in US.– If a product is subject to sales tax, it is added to the

bill only at the register, as in most other retail stores in the United States.

• From less salience to salience – Post tags showing the tax-inclusive price

• What will happen?

Page 13: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

More details

• one store of a national grocery chain.

• a 37,000 square foot supermarket with annual revenue of approximately $25 million and is located in a middle-income suburb in Northern California.

• Approximately 30 percent of the products sold in the store are subject to the local sales tax of 7.375 percent, which is added at the register.

Page 14: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

We posted tax-inclusive prices for all products in the three groups beginning February 22, 2006, and ending March 15, 2006.

• not “sales leaders” and to limit the duration of the intervention to three weeks.

• three groups of taxable toiletries (化妆品 ): cosmetics, hair care accessories, and deodorants(除臭剂 )– Products with relatively high prices– impulse purchase categories: high price elasticity

take up half an aisle of the store and together include about 750 distinct products

Page 15: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

• Does the tags matter for tax salience?

• Survey: asking each student to choose two goods and write down “the total bill due at the register for these two items.”– the photograph with the regular tags displaying

only the pretax prices

– a second photograph of products with our tax-inclusive price tags and asked students to repeat the exercise

• Reported a total price within $0.25 of the total tax-inclusive amount: 18% vs.75%

Page 16: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

Empirical Strategy• Compare changes in quantity sold in the

“treatment” group of products whose tags were modified with two “control” groups.

• The first control group is a set of products in the same aisles as the treatment products for which we did not change tags within the experimental store.(toothpaste, skin care, and shaving products)

• The second control group consists of all the toiletry products sold in a pair of stores in nearby cities.

• Difference-in Difference

Page 17: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

Data and results• Analyze on category level: no sold records

• Treatment group: 13 product categories

• Control group: 95 product categories

• Summary Statistics in Table 2

• Comparison of means in Table 3

• Regression estimates in Table 4

• Figure 1: permutation tests

Page 18: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

• Evidence from Observational Data on Alcohol Sales

Page 19: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

• Alcohol is subject to two taxes in most states: – an excise tax that is levied at the wholesale level and

is included in the price posted on the shelf or restaurant menu;

– a sales tax, which is added at the register

• the excise tax is included in the posted price, it is more salient than the sales tax.

• 分别估计 excise tax 和 sales tax 的需求弹性,两者是否相等?

• 暗含假定 excise tax全部反映在价格中

Page 20: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

• the excise tax is typically a specific tax (dollars per gallon of beer)– convert the excise tax rate into percentage units

– dividing the beer excise tax per case in year 2000 dollars by the average cost of a case of beer in the United States in the year 2000

• US state level data from 1970 to 2003

Page 21: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

Results • Table 6– Sales tax are raised during budgetary shortfalls– Excise tax and alcohol are contemporaneous.

• Table7: robust test– Excise tax: policy change and inflation

• IV fix price– Long time effects– Incidence of excise tax (IV for ACCRA beer price)– 40% of consumption is subject to sales tax (smaller

sample---food exempt)– Substitution among ethanol consumption

Page 22: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

• consumers underreact substantially to taxes that are not included in posted prices

• Uninformed vs. salience– no spillover effect

– no persistent learning effects

– elasticities of two tax donot converge

– survey (table1 panel B)

Page 23: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

Welfare analysis

Page 24: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

• sales tax levied on good x is a specific (unit) tax t S

• Good y, the numeraire, is untaxed

• tax revenue is not spent on the taxed good

• wealth Z and has utility u (x) + v( y).

Page 25: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft
Page 26: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

• Let p = p( t S ) denote the equilibrium pretax price that clears the market for good x as a function of the tax rate.

Page 27: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft
Page 28: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

• Attenuated Incidence on Producers.– the demand curve becomes more inelastic when

individuals are inattentive.

• No Tax Neutrality– Statutory incidence affects economic incidence,

contrary to intuition based on the full-optimization model

• Effect of Price Elasticity– depending on the extent to which the tax elasticity

covaries with the price elasticity .

Page 29: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft
Page 30: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft
Page 31: Salience and Taxation: Theory and Evidence Raj Chetty Adam Looney and Kory Kroft

• the economic incidence of a tax depends on its statutory incidence, and that even policies that induce no change in behavior can create efficiency losses.