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

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 significant...

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Bibliographic Details
Published in:American economic journal. Economic policy 2015-02, Vol.7 (1), p.95-118
Main Authors: Feldman, Naomi E., Ruffle, Bradley J.
Format: Article
Language:English
Subjects:
Consumer behavior
Consumers
Economic policy
Experiments
Goods
Laboratories
Point of sale
Price levels
Purchasing
Ruffles
Sales taxes
Shopping
Studies
Tax deductions
Tax rates
Taxes
Value added taxes
VAT
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Summary: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.
ISSN:1945-7731
1945-774X
DOI:10.1257/pol.20130101