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Complex Tax Incentives

Author

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  • Johannes Abeler
  • Simon Jäger

Abstract

How does complexity affect people's reaction to tax changes? To answer this question, we conduct an experiment in which subjects work for a piece rate and face taxes. One treatment features a simple tax system, the other a complex one. Subjects' economic incentives are identical across treatments. We introduce the same sequence of additional taxes in both treatments. Subjects in the complex treatment underreact to new taxes; some ignore new taxes entirely. The underreaction is stronger for subjects with lower cognitive ability. Contrary to predictions from models of rational inattention, subjects are equally likely to ignore large or small incentive changes (JEL D14, H24, H31)

Suggested Citation

  • Johannes Abeler & Simon Jäger, 2015. "Complex Tax Incentives," American Economic Journal: Economic Policy, American Economic Association, vol. 7(3), pages 1-28, August.
    • Handle: RePEc:aea:aejpol:v:7:y:2015:i:3:p:1-28
    Note: DOI: 10.1257/pol.20130137
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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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