Board of Governors of the Federal Reserve System

August 2012

The Impact of Tax Exclusive and Inclusive Prices on Demand

Naomi E. Feldman and Bradley J. Ruffle

Abstract:

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 analysis, intra-round revisions as well as results from a third tax-deduction treatment all cast doubt on salience as the source of our findings.

Keywords: Experimental economics, sales tax, VAT, tax salience

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