Andrew T. Hayashi

Experimental Evidence of Tax Salience and the Labor-Leisure Decision: Anchoring, Tax Aversion, or Complexity?

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: extend the tax salience and price partitioning literatures to the labor supply context; test the anchoring hypothesis by examining the effects of positive and negative wage surcharges on willingness to work; and 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.

Experimental Evidence of Tax Framing Effects on the Work/Leisure Decision

The choice between a set of alternatives often depends on how those alternatives are described, as well as their actual economic costs and benefits. We report results from an experiment designed to evaluate the impact of different descriptions of the after-tax wage on both (1) subjects’ willingness to perform a work task rather than an alternative leisure option, and (2) the amount of work performed by those subjects selecting the work task. Utilizing an experimental design that facilitates both within and between-subject comparisons, we find that that subjects’ willingness to work varies with the framing of the after-tax wage and that, in particular, subjects are much less willing to work when the returns to work are framed as a low wage plus a bonus than when the returns are described as a high wage minus a tax. Along the intensive margin we find suggestive evidence that subjects stop working just before their wage becomes subject to a significantly higher marginal tax rate, but we do not observe similar clustering when gross wages become subject to an equivalent wage decrease that is not described as a tax increase.

Experimental Evidence of Tax Salience and the Labor–Leisure Decision

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.

The Legal Salience of Taxation

The enforcement of tax laws affects the distribution of tax burdens. Many tax enforcement regimes incorporate taxpayer-initiated administrative procedures for adjusting tax liabilities. For these procedures, individual decisions to seek administrative relief are the first causal link in the chain of actions leading to tax adjustments, decisions that can be driven by factors that are arbitrary from the perspective of the tax law and vary across individuals, effectively resulting in heterogeneous enforcement. This effect can undermine the fairness and efficiency of the tax system, but has been largely ignored. Using a novel dataset, I study the property tax appeals process and find that the salience of the property tax has a large effect on the probability of appealing. Although tax scholars have studied market and political responses to tax salience, I report the first evidence of how salience affects individuals’ use of the legal system and introduce the concept of “legal salience.” I find that legal salience heterogeneity, unwittingly induced by government policy and private actors, effectively shifts the property tax burden in New York City toward certain mortgagors, who are more likely to be racial minorities, foreign-born, and working families with children. I argue that because enforcement effects can cause the actual assignment of tax liabilities to differ from the assignment stipulated under the law, tax laws should be evaluated in light of the pattern of enforcement that can reasonably be expected to arise rather than under an assumption of perfect enforcement.

The Effects of Refund Anticipation Loans on Tax Filing and EITC Takeup

The IRS has an uneasy relationship with tax return preparers. Preparers may ease the tax filing process and improve take-up of benefits like the earned income tax credit (EITC); however, preparers also profit from financial products sold in connection with tax preparation that have been viewed as exploitative. But can we have a market for low-income tax preparation without such products, and should we? I estimate the effects of regulation curtailing the market for refund anticipation loans (RALs) on a variety of outcomes, including demand for paid tax preparation, EITC take-up, and demand for other financial products, to explore the source of RAL demand and the relationship between RALs and tax compliance. Nearly eliminating RALs reduced demand for paid tax preparation and EITC take-up, and increased demand for an alternative product, which suggests that lack of access to the payment system may be an important driver of RAL demand and that even present-biased individuals may benefit from RALs.

Taking, Giving and Taking to Give: Experimental Evidence of Preferences over Actions

The desirability of an outcome often depends on the action that must be taken to bring it about. Using a within-subject design that permits the identification of individual preferences, I report experimental evidence from disinterested dictator games suggesting that preferences over income distributions depend on whether implementing those distributions requires the allocation of gains, the imposition of losses or the redistribution of pre-existing endowments. Subjects exhibit a stronger preference for equality when the action required to implement it involves the unequal allocation of income or redistribution of wealth than when it requires the unequal imposition of losses, an effect that increases in the amount of initial inequality. The evidence is inconsistent with any model of preferences defined solely over outcomes, but can be explained by existing models of narrow choice bracketing.