Tax awareness

The New York Times reviews Amy Finkelstein’s research on electronic toll payment and higher tolls. I have previously commented on that research here.

The result is pretty simple: Finkelstein argues that electronic toll payments make toll changes less salient; so when they are put up, there is less consumer outrage. If it is the government that is responsible, the consumers do not punish them as harshly as they would otherwise do. And when she looks at the ten year out level of tolls on roads with electronic tolling and those without them, there is an appreciable increase. Certainly consistent with that theory.

But does electronic tolling really decrease toll salience? It is true that you don’t have to fork out an amount every day, but you do have to pay a monthly bill. If you are a regular commuter the impact of that will be just as salient as the impact of a toll increase. So what the Finkelstein study is telling us is that governments who want to increase tolls will find it easier to do so when they do so with a big monthly hit rather than a daily one.

Now that to me has less to do with dollar salience (knowing what you are paying) than cents salience (knowingwhat amount of change you need to carry). Suppose, for example, that whenever you put in a change to tolls without electronic tolling, people really get annoyed by having to adjust how they gather up the right change. In this situation, you would not want to put in a toll increase unless it is a big one. But in that case the immediate political backlash (on the incumbents who do that) will be disproportionately high.

Compare this with electronic tolling. There you are not changing habits and so the annoyance will come with the monthly bill. Put in a small change and it impacts on that bill but the annoyance factor is something we can imagine will be far lower. So incumbents can get away with smaller increase and ‘spread the pain’ across inter-generational politicians. Hence, over a decade, tolls creep up. Of course, this would lead to a prediction that the frequency of toll increases will rise with electronic tolling (something that was unclear from the paper).

Anyhow, the paper is put in terms of government taxes and salience there. As regular readers know, the introduction of the baby bonus (a subsidy) had a big impact. But what is not appreciated is that a previous, similar subsidy actually existed. It was just more complex. So in many respects that finding was a finding on salience as much as economic incentives. However, what all this suggests is that salience will play a big role in any pricing; by firms or by governments. So when will a shrewd petrol retailer offer electronic fuelling?