To include or not to include VAT in the price tag?

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In most New York stores the prices of goods are labelled but do not include sales tax. So when you buy something labelled with a price of, say $15.99, you have add on an additional 8.875% to calculate the amount you will need to pay at the till. That is $17.39 when rounded in case that isn‘t instantly obvious to you.

It seems strange to me that the law should allow this at first sight. One of the major legitimate economic interventions of government is to help the free market function and one essential part of this is to ensure that customers have as much easily accessible information as possible. Why would the state allow stores to make it more difficult for consumers to understand the full cost of their purchases?

I certainly can’t make the necessary calculation quickly and easily in my head. If the tax were a nice round 10% or even 7.5% that would make it much easier. But 8.875%?! It’s almost as if the aim is to make it difficult.

So I started thinking about why it might be like this. I’ve not found any academic literature (presumably economic psychology) on this directly but I did manage to find a few websites where people wonder why this might be the case here, here and here.

Here are some suggestions I found:

1/ The stores want to make it clear how much the state is taxing. I don’t buy that because it is easy enough to mark with and without taxation on the ticket. This would also not explain why the state permits only before-tax prices to be shown.

2/ Consumers are easily fooled into believing a good is cheaper than it is if the before-tax cost is used. This would be the case if consumers systematically under-estimate the amount of tax. Here, competition between stores would ensure that all had to label the before-tax value. This might be true but I suspect that most people would prefer to round up to 10% and in fact, over-estimate the tax. That would give any store that included tax an advantage. In addition it could gain a competitive advantage by stating the tax was included. This also does not explain why the state permits stores not to include the tax on the ticket.

3/ The idea I like best is that it is actually to permit openness amongst different states and can even vary from city to city. Since sales taxes are set by local governments, the amounts are different in each state - the ever-reliable Wikipedia explains state-by-state taxation and THIS SITE summarises sales taxes by state. I am tempted to buy that but (1) I do not believe that the relevant comparison for most consumers is prices between different states but are more likely to be within the same state and city. By allowing shops to use before-tax prices, the state is making purchase decisions more difficult for most consumers; and (2) in some places the sales tax is included in the ticket in any case so why is one comparison better than the other?

One obvious other example in which taxes are sometimes included and sometimes are not are airline tickets. Personally, I always prefer to be shown the complete price first and tend to go for options that do include the taxes simply for the ease of calculation.

I don't really consider this mystery solved, so if anyone has any suggestions, they would be very welcome.