Investment behavior and the biased perception of limited loss deduction in income taxation
AbstractWe use a laboratory experiment to study the extent to which investors’ choices are affected by limited loss deduction in income taxation. We first compare investment behavior in the no tax baseline to a tax control setting, in which the income from investments is taxed. We find that investors significantly reduce their risk-taking as predicted by theory. Next we compare the baseline investment choices to choices under three different types of income taxation. We observe that risk-taking is significantly increased with partial and with capped loss deduction, but is unaffected by a tax system that allows no loss deduction. Since in all these treatments the after tax outcomes of the prospects were identical, we conjecture that investors have a positively biased perception of partial and capped loss deduction that promotes their willingness to take risks.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Behavior & Organization.
Volume (Year): 81 (2012)
Issue (Month): 1 ()
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Risk-taking behavior; Distorting taxation; Tax perception;
Other versions of this item:
- Martin Fochmann & Dirk Kiesewetter & Abdolkarim Sadrieh, 2010. "Investment Behavior and the Biased Perception of Limited Loss Deduction in Income Taxation," FEMM Working Papers 100004, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- D14 - Microeconomics - - Household Behavior - - - Personal Finance
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
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