The Impact of Tax Exclusive and Inclusive Prices on Demand

Naomi E. Feldman, Bradley J. Ruffle
2012 Social Science Research Network  
We test the equivalence of tax-inclusive and tax-exclusive prices through a series of experiments that differ 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 when faced with tax-exclusive prices. This treatment effect is robust to different price levels, to initial shopping-cart purchases and persists throughout most of the ten rounds. A goods-level
more » ... , intra-round revisions as well as results from a third tax-deduction treatment all cast doubt on salience as the source of our findings. JEL codes: C91, H20, H31. seminar participants from Ben-Gurion University, the Federal Reserve Board, GMU, LMU, the 4 th Psychology of Investment Conference, Office of Tax Analysis (US Department of Treasury), University of Michigan and UCSD for valuable comments. Ziv Ben-Naim provided excellent research assistance. We are grateful to Ben-Gurion University for funding the experiments. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by the Board of Governors of the Federal Reserve Board or members of the research staff. All errors are our own.
doi:10.2139/ssrn.2026937 fatcat:5xcaydod7rdujon7ehlrucpizi