Goldin & Homonoff - DataSpace at Princeton University

Should governments levy commodity taxes at the register or include them in a good’s posted price?
Traditional approaches to the economics of taxation offer little guidance to policymakers grappling with
this question. Indeed, neoclassical theory suggests that this aspect of tax design – the choice between
“posted” and “register” taxes – does not affect consumer welfare because consumers correctly compute
and account for all taxes that will be assessed on a given transaction. However, a series of recent findings
call that invariance prediction into doubt. For example, Raj Chetty, Adam Looney, and Kory Kroft (CLK)
(2009) present compelling evidence that consumers pay more attention to goods’ posted prices than to
register taxes because the former are more salient – consumers see the posted tax-inclusive price when
making their purchasing decisions. Related empirical findings by Amy N. Finkelstein (2009) and Marika
I. Cabral and Caroline M. Hoxby (2010) are also consistent with the hypothesis that the salience of a tax
shapes the extent to which consumers perceive it. This line of research suggests that the policy choice
between posted and register taxes may not be as irrelevant as neoclassical theory predicts.
This paper investigates the distributional effects of the government’s choice between posted and reg-
ister taxes. Part I considers the case in which consumers differ in their attentiveness to register taxes – that
is, when only some consumers take register taxes into account when making their purchasing decisions.
Drawing on a stylized model of consumer behavior, we show how a revenue-neutral shift from posted to
register taxes reduces the tax burden on attentive consumers, unambiguously improving the welfare of
that group.
We then turn to a practical implication of this insight. A concern with many commodity taxes is
that they are regressive – they constitute a proportionately greater burden for low-income taxpayers.
However, if low-income consumers pay more attention to register taxes than high-income consumers
do, policymakers can reduce a tax’s regressivity by adding it at the register instead of including it in
the commodity’s posted price. Conversely, when low-income consumers are relatively less attentive to
register taxes, reducing a tax’s salience will exacerbate its regressivity. Hence, knowing how consumers’
attentiveness to register taxes varies by income is essential for understanding the distribution of a tax’s
burden.
Part II investigates that question empirically in the context of cigarette taxes. Cigarette purchases
are typically subject to two types of taxes in the United States: an excise tax, which is included in the
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