The Impact of Including, Adding, and Subtracting a Tax on Demand | Zendy

Naomi E. Feldman | Zendy; Bradley J. Ruffle | Zendy

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The Impact of Including, Adding, and Subtracting a Tax on Demand

Author(s) -

Naomi E. Feldman,

Bradley J. Ruffle

Publication year - 2015

Publication title -

american economic journal economic policy

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 7.868

H-Index - 62

eISSN - 1945-7731

pISSN - 1945-774X

DOI - 10.1257/pol.20130101

Subject(s) - monetary economics , tax credit , economics , cash , ad valorem tax , tax reform , deferred tax , value added tax , indirect tax , equivalence (formal languages) , microeconomics , public economics , state income tax , macroeconomics , gross income , linguistics , philosophy

We test the equivalence of tax-inclusive, tax-exclusive and tax-rebate prices through a series of experiments differing 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 under tax-exclusive prices whereas total purchases under tax-inclusive and tax-rebate prices are similar. These results persist throughout most of the ten rounds despite feedback and the ability to revise purchases. The asymmetric response to tax liabilities and rebates highlights consumers' ability both to internalize and to willfully ignore hidden price components. (JEL D12, H25, H31)

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