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Complex Tax Incentives: An Experimental Investigation

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  • Abeler, Johannes

    ()
    (University of Oxford)

  • Jäger, Simon

    ()
    (Harvard University)

Abstract

How does the tax system's complexity affect people's reaction to tax changes? To answer this question, we conduct a real-effort experiment in which subjects receive a piece rate and face a set of taxes. In one treatment the tax system is simple; in the other treatment it is highly complex. The payoff-maximizing effort level and the incentives around this optimum are, however, identical across treatments. We then introduce the same sequence of additional tax rules in both treatments. We find that subjects in the complex treatment adjust their effort provision less in response to a new tax than subjects in the simple treatment. Many subjects in the complex treatment even ignore the new rule entirely, repeating their previous choice. Contrary to predictions from models of rational inattention, we find no evidence that subjects are less likely to ignore larger changes in incentives. Our results suggest that the effect of a newly introduced tax will be attenuated in a more complex tax system.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7373.

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Length: 49 pages
Date of creation: Apr 2013
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Handle: RePEc:iza:izadps:dp7373

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Keywords: laboratory experiment; salience; attention; taxation; complexity;

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Cited by:
  1. Tuomas Kosonen & Olli Ropponen, 2013. "The role of information in tax compliance: Evidence from a natural field experiment," Working Papers 48, Government Institute for Economic Research Finland (VATT).
  2. Doerrenberg, Philipp & Duncan, Denvil, 2014. "Tax Incidence in the Presence of Tax Evasion," IZA Discussion Papers 8137, Institute for the Study of Labor (IZA).

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