Isolation effects and the neglect of indirect effects of fiscal policies



People tend to focus on salient cues, ignoring others. We demonstrate such isolation effects in situations involving taxes and public finance, through experiments conducted on the World Wide Web. In general, subjects minimized or ignored the longer-term or indirect effects of tax policies, such as price increases from business taxes. Subjects preferred “hidden” taxes to transparent ones, failing to think through who would ultimately pay. The preference for hidden taxes was greater when it was uncertain who would pay. When subjects were prompted to think about indirect effects, their preference for hidden taxes was reduced but not eliminated. These observations are symptoms of general tendencies not to think ahead about the effects of public policies. Copyright © 2006 John Wiley & Sons, Ltd.