Recent evidence suggests consumers fail to account for taxes that are excluded from a good’s displayed price. What is less understood is whether and how such “salience effects” depend on the magnitude of the tax. We conduct a laboratory shopping experiment with real stakes to study the effect of tax size on salience. We find no evidence that salience effects decline as the tax rate increases; we document a statistically significant salience effect at a tax rate that is considerably larger than the tax rates at which such effects have been previously documented. In fact, our results are more consistent with the hypothesis that higher taxes make consumers less attentive (at least for the range of taxes we consider). This result can be explained by a confirmation bias theory of salience: consumers tend to disregard information (like a tax) that does not align with their intention to purchase an item, and this lack of alignment increases in the size of the tax.
Bibliographical noteFunding Information:
We thank Taylor Cranor, Henry Farber, David Lee, Alexandre Mas, Baxter Oliphant, Daniel Reck, Bradley Ruffle, Erez Semaria, and numerous seminar and conference participants for helpful suggestions. Financial support from the Princeton Industrial Relations Section and Princeton Lab for Experimental Social Science is gratefully acknowledged. The views expressed in this article are those of the authors and do not necessarily reflect those of the Federal Reserve Board. Any remaining errors are our own.
© 2018, University of Chicago Press. All rights reserved.
- Confirmation bias
- Sales tax