Experimental Evidence of Tax Salience and the Labor–Leisure Decision

Abstract

Recent research in marketing and public economics suggests that consumers underestimate the effects of taxes and surcharges on total purchase prices when taxes and surcharges are made less salient. The leading explanation is that consumers anchor on base prices and underadjust for surcharges. We perform experiments that (1) extend the tax salience and price partitioning literatures to the labor supply context, (2) test the anchoring hypothesis by examining the effects of positive and negative wage surcharges on willingness to work, and (3) test whether responses to price partitioning result from imperfect calculation of all-inclusive prices or from deeper preferences. We reject the anchoring hypothesis and find that subjects are less willing to work both when their wages are partitioned with positive and with negative surcharge components. We also find evidence that partitioned pricing effects result from cognitive limitations and possibly from responses to complexity.

Tax Misperception and its Effects on Decision Making – Literature Review and Behavioral Taxpayer Response Model

“…Another strand of literature is based on lab experiments. Hayashi et al (2013) find that subjects in net-equivalent treatments are less willing to work both when their wages are partitioned with positive (bonus) and with negative surcharge (tax) components. They explain this result with subjects' complexity aversion.…”

Fairness-Adjusted Laffer Curve: Strategy versus Direct Method

“…Leisure options such as reading magazines, playing video games and money have been used in the literature [13,14]. In our experiment, money was used as a proxy for the leisure based on the work of Hayashi et al [15]. The leisure money was termed as outside option during the experiment and its net value was identical for both the direct and the strategy methods.…”

The framing effect of tax–transfer systems

“…However, a growing body of literature on tax perception and tax salience suggests that the framing of tax systems or compensation schedules may affect people's labor supply. Prior studies have shown that, under the strictly held theoretical equivalence condition, subjects tended to (1) work harder when tax was levied on consumption rather than income (Blumkin, Ruffle, and Ganun 2012); (2) exert higher effort under a higher gross wage rate subjected to higher taxes rather than a lower gross wage rate with lower or no taxes (Fochmann et al 2013;Hayashi, Nakamura, and Gamage 2013); (3) exhibit stronger preferences for a larger public sector when tax was levied on the employer side rather than the employee side (Weber and Schram 2017); and (4) respond more sensibly to tax changes when they occurred under a simple tax system rather than a complex one (Abeler and Jäger, 2015). Relatedly, people also tended to consume more when the consumption tax was less, rather than more salient (Chetty, Looney, and Kroft 2009;Feldman and Ruffle 2015) and were keener to save a fiscal bonus when it was labeled as a tax rebate rather than an income increase (Lozza, Carrera, and Bosio 2010).…”