Establishing a value added tax (VAT) in the United States is a topic of considerable debate and controversy. Such a tax, which would add a fixed percentage to every product or service, is standard in many European countries. There has been discussion about whether to add a VAT on top of existing taxes, or whether to reduce income taxes and offset the revenue losses with a VAT. Ted Gayer, Co-Director of Brooking’s Economic Studies, wonders what the behavioral implications of such a tax would be.
Traditionally, economists view the structure and application of a tax as unimportant. All that matters is the change in relative prices. But (economists Raj Chetty, Adam) Looney, and (Kory) Kroft find that structure and application do matter. For example, they find that consumers are less likely to buy an item if a sales tax is explicitly listed on the product than if the same tax is instead added at check-out.
The economists’ argument stems from a recent American Economic Review paper of a field experiment in a grocery store that varied the displayed prices of alcohol (gated copy here). The VAT raises interesting questions for policymakers who might be able to manipulate the salience of taxes in ways that would bring in more tax revenue, but potentially harm consumers. Check out the link to Brookings (Hat tip: Amol Agrawal).