Joel Slemrod (University of Michigan, Ross School of Business) presents Buenas Notches: Lines and Notches in Tax System Design and Car Notches at NYU today as part of its Colloquium Series on Tax Policy and Public Finance. The co-convenors of the colloquium are Daniel Shaviro (NYU) & Mihir Desai (Harvard Business School).

Here is the Conclusion of Buenas Notches:

The primary objectives of this paper are to highlight the ubiquity of tax policy notches and and to begin inquiry into their consequences for behavior and their role in an optimal tax system. The taxonomy of notches proposed here is a first step. The demonstration of their welfare inferiority absent considerations of administrative cost or salience suggests that the latter issues need more attention. As long as they persist, though, behavior in their presence has the potential to provide information about preferences and technologies. However, this agenda is made difficult by the need to separate out preferences and technologies on the one hand from mitigating salience factors on the other. Finally, the widespread use of surrogate tax bases, where the base comprises items that do not enter utility (or production) functions, implies that behavioral response depends both on the structural parameters of utility and production functions and on the relationship between the surrogate tax base and the variables that directly affect utility or profit.

Here is the abstract of Car Notches:

Notches — where small changes in behavior lead to large changes in a tax or subsidy — figure prominently in many policies, but have been rarely examined by economists. In this paper, we analyze a class of notches associated with policies in the United States and Canada aimed at improving vehicle fuel economy. We provide several pieces of evidence showing that automakers respond to notches in fuel economy policy by precisely manipulating fuel economy ratings so as to just qualify for more favorable treatment. We then describe the welfare consequences of this behavior, derive a welfare summary statistic applicable to many contexts, and draw lessons for corrective taxation in the presence of notches. Finally, we use a comparison of the amount of strategic manipulation that occurs surrounding tax notches to the amount surrounding presentation notches in fuel economy label rules as a way of estimating consumer willingness to pay for fuel economy.

Update: Dan Shaviro calls Buenas Notches a "delightfuly playful and whimsical paper."