Out of Sight, out of Mind ? Estimating Attention to Tax Reforms

Sacha Dray
London School of Economics

Abstract

This paper measures the role of salience in the behavioral response of taxpayers. I focus on the 2011 reform of the UK income tax that introduced changes in the tax schedule that created salient changes (a new marginal tax rate of 50% on income above £150,000) as well as nonsalient changes (the withdrawal of tax-free personal allowance for income above £100,000). I develop a conceptual framework to account for inattention as a form of optimization friction when estimating the elasticity of taxation income, provide testable predictions, and derive a measure of inattention. Empirical evidence from administrative data confirm the importance of inattention. I find that on average 44% of taxpayers ([27%, 61%]) did not pay attention to the nonsalient marginal tax rate. I also provide evidence of learning over time, reducing inattention by 40% 10 years after the introduction of the reform. These results have implications for the measure of elasticity of taxable income, and suggest time-limited gains from using salience as a policy parameter.

Presentation