E-ZTax: Tax Salience and Tax Rates

This paper tests the hypothesis that the salience of a tax system affects equilibrium tax rates. I analyze how toll rates change after toll facilities adopt electronic toll collection, under which tolls are automatically deducted as the car drives through the toll plaza, eliminating the need to hand over cash. A survey I conducted indicates that drivers are much less aware of toll rates when they pay electronically. I find that, in steady state, toll rates are 20 to 40 percent higher than they would have been without electronic toll collection. Two additional findings support the hypothesis that electronic toll collection increases the toll rate by decreasing its salience: following adoption of electronic toll collection, the short run elasticity of driving with respect to the toll declines (in absolute value), and toll setting behavior becomes less sensitive to the local election calendar. I consider a variety of alternative explanations for these results and conclude that these are unlikely to be able to explain the findings.