Paul L. Caron

Saturday, August 13, 2011

Protecting Consumers From Tax-Exclusive Pricing

Hayes Holderness (J.D. 2011, NYU) has published Note, Price Includes Tax: Protecting Consumers From Tax-Exclusive Pricing, 66 N.Y.U. Ann. Surv. Am. L. 783 (2011). Here is part of the Introduction:

This Note is divided into five parts. Part I describes the current tax disclosure scheme for consumer goods and also how consumers make their purchasing decisions. This Part provides background information necessary to frame the remaining discussions, describing the current tax disclosure regime and illustrating the consumer purchase decisionmaking process that leads to the undervaluation of undisclosed taxes. Because current law does not require the disclosure of all taxes on the price tag and because consumers make their purchasing decisions based on price tags and not total cost, the current tax disclosure regime can be expected to negatively affect consumer purchasing decisions.

Part II considers the effects of tax salience on consumers, concluding that hidden taxes should be expected and that consumers undervalue those taxes. Both rational actor theory and behavioral economics analyses are used to reach this conclusion. Rational actor theory shows that consumers should be expected to ignore taxes on very low priced items, calculate taxes on highly priced items, and approximate taxes on the remainder of their purchases. Behavioral economics enhances this showing by explaining why individuals, suffering from multiple cognitive biases, will either ignore or approximate the taxes on most items; and when they approximate, they will systematically undervalue the cost of those taxes.

Part III discusses the welfare implications of consumers' undervaluation of taxes. This Part finds that hidden taxes likely harm social welfare by fostering over-taxation and by operating in a regressive manner. Individuals suffer from the income effects of their undervaluations, causing them to decrease their savings, work more than they would prefer, take on increased amounts of debt, or cut consumption of other desired products. Given that hidden *786 taxes likely cause social harm, there do not appear to be any benefits to individuals that offset the harms of overconsumption.

Part IV considers the policy implications of these harms. This Part establishes that the FTC is the best actor to solve the problem of these harms, and that it has the authority to act. By analyzing the harms through the FTC's unfair trade practice jurisprudence, it is shown that tax-exclusive pricing is an unfair trade practice. The strengths and weaknesses of the different tax disclosure schemes are then considered, and it is shown why requiring that both the tax-inclusive price and the tax on an item be presented is the best way to prevent consumer harms. Part V concludes.

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