International Tax and Public Finance

, Volume 10, Issue 2, pp 189–203 | Cite as

Behavioral Public Finance: Tax Design as Price Presentation

  • Aradhna Krishna
  • Joel Slemrod


In this essay we review the evidence from marketing research about price presentation of consumer products and discuss how these lessons have been applied—consciously or unconsciously—in the design of the U.S. tax system. Our perspective is that, in most situations, the designers of the tax system attempt to minimize the perceived burden of any given amount of tax collections. We allow, though, that in certain situations an additional goal is to maximize the perceived burden of others. We also investigate how, when the objective is to encourage a particular activity, price presentation may enhance the achievement of that goal for a given amount of tax subsidy. We conclude by addressing the ethical and normative implications of price presentation in the tax system.

tax policy behavioral economics price presentation 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Barlow, T. and M. S. Wogalter. (1993). “Alchoholic Beverage Warnings in Magazine and Television Advertisements.” Journal of Consumer Research 20, 147-156.Google Scholar
  2. Birnbaum, J. H. and A. S. Murray. (1988). Showdown at Gucci Gulch: Lawmakers, Lobbyists, and the Unlikely Triumph of Tax Reform. New York: Vintage Books.Google Scholar
  3. Biswas, A., E. J. Wilson and J. W. Licata. (1993). “Reference Pricing Studies in Marketing: A Synthesis of Research Results.” Journal of Business Research 27(3), 239-256.Google Scholar
  4. Bichanana, J. M. (1967). Public Finance in Democratic Process. Chapel Hill: University of North Carolina Press.Google Scholar
  5. Burman, L. E., K. A. Clausing and J. F. O'Hare. (1994). “Tax Reform and Realizations of Capital Gains in 1986.” National Tax Journal 47(1), 1-18.Google Scholar
  6. Cox, D. (1997). “Cox Direct 19th Annual Survey of Promotional Practices.” Largo, Florida.Google Scholar
  7. Darke, P. R. and J. L. Freedman. (1993). “Deciding Whether to Seek a Bargain: Effects of both Amount and Percentage Off.” Journal of Applied Psychology 78(6), 960-965.Google Scholar
  8. Direct Marketing. (1997). “Direct Intelligence.” January, p. 6.Google Scholar
  9. Dollery, B. E. and A. C. Worthington. (1996). “The Empirical Analysis of Fiscal Illusion.” Journal of Economic Surveys 10(3), 261-297.Google Scholar
  10. Economist. (1992). “Procter's Gamble.” July 25.Google Scholar
  11. Frankenberger, K. D. and R. Liu. (1994). “Does Consumer Knowledge Affect Consumer Responses to Advertised Reference Price Claims?” Psychology and Marketing 11(3), 235-251.Google Scholar
  12. Gourville, J. T. (1998). “Pennies-a-Day: The Effect of Temporal Reframing on Transaction Evaluation.” Journal of Consumer Research 24(March), 395-408.Google Scholar
  13. Greenleaf, E. A. (1995). “The Impact of Reference Price Effects on the Profitability of Price Promotions.” Marketing Science 14(Winter), 82-104.Google Scholar
  14. Hall, R. E. and A. Rabushka. (1995). The Flat Tax. 2nd ed., Stanford, CA: Hoover Institution Press.Google Scholar
  15. Hardie, B. G. S., E. J. Johnson and P. S. Fader. (1993). “Modeling Loss Aversion and Reference Dependence Effects on Brand Choice.” Marketing Science 12(Fall), 378-394.Google Scholar
  16. Hite, P. A. and M. Roberts. (1991). “An Experimental Evaluation of Taxpayer Judgments on Rate Structure in the Individual Income Tax System.” Journal of the American Taxation Association 13, 47-63.Google Scholar
  17. Hoch, S. J., X. Dr´eze and M. E. Purk. (1994). “EDLP, Hi-Lo, and Margin Arithmetic.” Journal of Marketing 58(October), 16-29.Google Scholar
  18. Hotz, W. J. and J. K. Scholz. (2001). “The Earned Income Tax Credit.” NBER Working paper No. 8078, January.Google Scholar
  19. Johar, G. V. and C. J. Simmons. (2000). “The Use of Concurrent Disclosures to Correct Invalid Inference.” Journal of Consumer Research 26(4), 307-322.Google Scholar
  20. Kahneman, D. and A. Tversky. (1979). “Prospect Theory: An Analysis of Decision Under Risk.” Econometrica 47(March), 363-391.Google Scholar
  21. Kalyanaram, G. and J. D. C. Little. (1994). “An Empirical Analysis of Latitude of Price Acceptance in Consumer Packaged Goods.” Journal of Consumer Research 21(3), 408-418.Google Scholar
  22. Kalwani, M. U., C.-K. Yim, H. J. Rinne and Y. Sugita. (1990). “A Price Expectations Model of Consumer Brand Choice.” Journal of Marketing Research 27, 251-262.Google Scholar
  23. Krishna, A. and G. V. Johar. (1996). “Consumer Perception of Deals: Biasing Effects of Varying Deal Prices.” Journal of Experimental Psychology: Applied 2(3), 187-206.Google Scholar
  24. Krishna, A., R. Briesch, D. Lehmann and H. Yuan. (2002). “A Meta-Analysis of the Effect of Price Presentation on Deal Evaluation.” Journal of Retailing 78(2), 101-118.Google Scholar
  25. Levin, I. P., S. L. Schneider and G. J. Gaeth. (1998). “All Frames Are Not Created Equal: A Typology and Critical Analysis of Framing Effects.” Organizational Behavior and Human Decision Processes 76(2), 149-188.Google Scholar
  26. Linville, P.W. and G.W. Fischer. (1991). “Preferences for Separating or Combining Events.” Journal of Personality and Social Psychology 60(January), 5-23.Google Scholar
  27. Linder, M. (1996). “Eisenhower-Era Marxist-Confiscatory Taxation: Requiem for the Rhetoric of Rate Reduction for the Rich.” Tulane Law Review 70(4), 905-1040.Google Scholar
  28. Los Angeles Times, October 9. (1997). “The Art of the Tie-in: Cross-Promotions and Rebates in the Video Industry are Reaching a Fevered Pitch.” D1.Google Scholar
  29. McCaffery, E. J. (1994). “Cognitive Theory and Tax.” UCLA Law Review 40, 1861-xx; Cass. R. Sunstein (ed.), (2000). Behavioral Law and Economics. Cambridge: Cambridge University Press, 398-421 (Revised version).Google Scholar
  30. McCaffery, E. J. (2000). “Cognitive Theory and Tax.” In C. R. Sustein (ed.), Behavioral Law and Economics. Cambridge: Cambridge University Press.Google Scholar
  31. McCaffery, E. J. and J. Baron. (2002). “The Humpty Dumpty Blues: Disaggregation Bias in the Evaluation of Tax Systems.” Mimeo, University of Southern California Law School, January 22.Google Scholar
  32. Mela, C. F., S. Gupta and D. R. Lehmann. (1997). “The Long-Term Impact of Advertising and Promotion on Consumer Brand Choice.” Journal of Marketing Research 34(May), 248-261.Google Scholar
  33. Mill, J. S. (1994). Principles of Political Economy, 1st ed., 1848. Oxford: Oxford University Press.Google Scholar
  34. Morwitz, V. G., E. A. Greenleaf and E. J. Johnson. (1998). “Divide and Prosper: Consumers' Reactions to Partitioned Prices.” Journal of Marketing Research 35(November), 453-463.Google Scholar
  35. Muehling, D. D. and R. H. Kolbe. (1997). “Fine Print in Television Advertising: Views from the Top.” Journal of Advertising 26(3), Fall, 1-15.Google Scholar
  36. Oates, W. E. (1988). “On the Nature and Measurement of Fiscal Illusion: A Survey.” In G. Brennan, B. S. Grewel, and P. Groenwegen (eds.), Taxation and Fiscal federalism: Essays in Honour of Russell Mathews. Sydney: Australia University Press.Google Scholar
  37. Paul, R. E. (1947). Taxation for Prosperity. Indianapolis: Bobbs-Merrill.Google Scholar
  38. Putler, D. (1992). “Incorporating Reference Price Effects into a Theory of Consumer Choice.” Marketing Science 11(3), 287-309.Google Scholar
  39. Schelling, T. (1981). “Economic Reasoning and the Ethics of Policy.” Public Interest 63, 37-61.Google Scholar
  40. Schindler, R. M. and P. N. Kirby. (1997). “Patterns of Rightmost Digits Used in Advertised Prices: Implications for Nine-ending Effects.” Journal of Consumer Research 24(2), 192-201.Google Scholar
  41. Scholz, J. Karl. (1994). “The Earned Income Tax Credit; Participation, Compliance, and Antipoverty Effectiveness.” National Tax Journal 47(1), 63-85.Google Scholar
  42. Shefrin, H. M. and R. H. Thaler. (1988). “The Behavioral Life-Cycle Hypothesis.” Economic Inquiry 26(October), 609-643.Google Scholar
  43. Shlaes, A. (1999). The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It. San Diego: Harcourt, Inc.Google Scholar
  44. Slemrod, J. (2001a). “Trust in Public Finance.” Mimeo. University of Michigan.Google Scholar
  45. Slemrod, J. (2001b). “A General Model of the Behavioral Response to Taxation.” International Tax and Public Finance 8(March), 119-128.Google Scholar
  46. Slemrod, J. and J. Bakija. (2000). Taxing Ourselves: A Citizens' Guide to the Great Debate over Tax Reform, 2nd ed., Cambridge, MA: MIT Press.Google Scholar
  47. Slemrod, J. and S. Yitzhaki. (1994). “Analyzing the Standard Deduction as a Presumptive Tax.” International Tax and Public Finance 1(1), 41-51.Google Scholar
  48. Soman, D. (1998). “The Illusion of Delayed Incentives: Evaluating Future Effort-Money Transactions.” Journal of Marketing Research 35(November), 427-437.Google Scholar
  49. Stark, O. and J. E. Taylor. (1989). “Relative Deprivation and International Migration.” Demography 26(1), 1-14.Google Scholar
  50. Thaler, R. H. (1980). “Toward a Positive Theory of Consumer Choice.” Journal of Economic Behavior and Organisation 1(March), 39-60.Google Scholar
  51. Thaler, R. H. (1985). “Mental Accounting and Consumer Choice.” Marketing Science 4(Summer), 199-214.Google Scholar
  52. Thaler, R. H. (1994). “Psychology and Savings Policies.” American Economic Review 84(2), 186-192.Google Scholar
  53. Tversky, A. and I. Simonson. (1993). “Context-Dependent Preferences.” Management Science 39(October), 1179-1189.Google Scholar
  54. Tyran, J.-R. and R. Sausgruber. (2001). “On Fiscal Illusion.” Mimeo, University of St. Gallen.Google Scholar
  55. Wall Street Journal, Feb. 10. (1998). “Rebates' Secret Appeal to Manufacturers: Few Consumers Actually Redeem Them.” D1.Google Scholar

Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  • Aradhna Krishna
    • 1
  • Joel Slemrod
    • 1
  1. 1.Business SchoolUniversity of MichiganAnn Arbor

Personalised recommendations