A central assumption in public finance is that individuals optimize fully with respect to the incentives created by tax policies. In this paper, we test this assumption using two empirical strategies. First, we conducted an experiment at a grocery store where we posted tax-inclusive prices for 750 products subject to sales tax for a three week period. Using scanner data, we find that posting tax-inclusive prices reduced demand by roughly 8 percent among the treated products relative to control products and stores. Second, we find that state-level increases in excise taxes (which are included in posted prices) reduce aggregate alcohol consumption signi…cantly more than increases in sales taxes (which are added at the register and hence less salient). Both sets of results indicate that tax salience a¤ects behavioral responses. We propose a bounded rationality model to explain why salience matters, and show that it matches our evidence as well as several additional stylized facts. In the model, agents incur second-order (small) utility losses from ignoring some taxes, even though these taxes have first-order (large) effects on social welfare and government revenue. Using this theoretical framework, we develop elasticity-based formulas for the efficiency cost and incidence of commodity taxes when agents do not optimize fully.

The debate between “structural” and “reduced-form” approaches has generated substantial controversy in applied economics. This article reviews a recent literature in public economics that combines the advantages of reduced-form strategies –transparent and credible identification – with an important advantage of structural models – the ability to make predictions about counterfactual outcomes and welfare. This literature has developed formulas for the welfare consequences of various policies that are functions of reduced-form elasticities rather than structural primitives. I present a general framework that shows how many policy questions can be answered by estimating a small set of sufficient statistics using program evaluation methods. I use this framework to synthesize the modern literature on taxation, social insurance, and behavioral welfare economics. Finally, I discuss problems in macroeconomics, labor, development, and industrial organization that could be tackled using the sufficient statistic approach.

The majority of Americans opposes the estate tax, even though it affects only a small number of wealthy people. Scholarly investigations of this puzzle have debated the role of knowledge about the tax. Do at least some people support the estate tax because they are ignorant of its limited scope? If people were better informed, would more of them support this tax? Via experiments, I demonstrate the causal effects of information about who pays the estate tax, as well as arguments for and against it. I find that this information does reduce opposition to the estate tax, and that it does so primarily among the poorer conservatives and Republicans. The combination of this information and various arguments also tend to shift opinion in favor of the tax. These findings contrast with previous research and suggest that knowledge (or lack thereof) is central to understanding public opinion about the estate tax. 1 Many facts about public policy elude citizens. Policies can be difficult to understand, politicians have little incentive to educate, and citizens have little incentive to learn. This much is

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