| Abstract |
Although transparency has long been held as the key principle of taxation, recent behavioral public finance theory has shown that it may reduce social welfare as inattention can alleviate behavioral distortions. This paper extends this analysis by modeling inattention as a noise in the tax rate signal received by Bayesian citizens. In equilibrium, we find that transparency will improve social welfare by ensuring the government’s ability to commit to a fairly low tax rate that is socially optimal. Moreover, this model yields a new sufficient statistics formula. Based on typical estimates of attention parameters and marginal cost of public funds, this formula suggests that ensuring tax transparency is worth incurring approximately 10 percent of the revenue currently estimated for the U.S. tax system.
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