The Possible Effects of Personal Income Tax and Value Added Tax on Consumer Behaviors

Abstract

In economics literature, it is accepted that all people are rational and they try to maximize their utilities as possible as they can. In addition, economic theories are formed with the assumptions not suitable to real life. For instance, indifference curves are drawn with the assumptions that there are two goods, people are rational, more is preferred to less and so on. Hence, the consumer behaviors are guessed according to this analysis. Nevertheless, these are invalid in real life. And this inconsistencey are examined by behavioral economics and neuroeconomics. Behavioral economics claims that people can behave what they are not expected since people can be irrational, their willpower is limited and altruistic behaviors can be seen and they can give more value to what they own. As a result of these, consumer behaviors become more different than that of economic theory. In addition to behavioral economics, neuroeconomics also examines consumer behaviors more differently than mainstream economic theory. It emphasizes the people using prefrontial cortex of the brain are more rational than the people using hippocampus of the brain. Therefore, people can make illogical choices compared to economic theory. In these cases, levying taxes such as personal income tax or value added tax can be ineffective or effective. In other words, the effect becomes ambigious. Hence,the hypothesis that if government desires to levy personal income tax or value added tax, it makes a detailed research in terms of productivity of taxes forms the fundamental of this study.