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Investment Behavior and the Biased Perception of Limited Loss Deduction in Income Taxation

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  • Martin Fochmann

    ()
    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Dirk Kiesewetter

    ()
    (Faculty of Economics and Management, JUlius-Maximilians University Würzburg)

  • Abdolkarim Sadrieh

    ()
    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

Abstract

We 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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File URL: http://www.ww.uni-magdeburg.de/fwwdeka/femm/a2010_Dateien/2010_04.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 100004.

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Length: 30 pages
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:mag:wpaper:100004

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Keywords: risk-taking behavior; distorting taxation; tax perception;

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Cited by:
  1. Matthias Weber & Arthur Schram, 2013. "The Non-Equivalence of Labor Market Taxes: A Real-Effort Experiment," Tinbergen Institute Discussion Papers 13-030/I, Tinbergen Institute.
  2. Ackermann, Hagen & Fochmann, Martin & Mihm, Benedikt, 2012. "Biased effects of taxes and subsidies on portfolio choices," arqus Discussion Papers in Quantitative Tax Research 138, arqus - Arbeitskreis Quantitative Steuerlehre.
  3. Ackermann, Hagen & Fochmann, Martin & Mihm, Benedikt, 2013. "Biased effects of taxes and subsidies on portfolio choices," Economics Letters, Elsevier, vol. 120(1), pages 23-26.
  4. Fahr, René & Janssen, Elmar & Sureth, Caren, 2014. "Can tax rate increases foster investment under entry and exit flexibility? Insights from an economic experiment," arqus Discussion Papers in Quantitative Tax Research 166, arqus - Arbeitskreis Quantitative Steuerlehre.
  5. Schüßler, Katharina & Hewig, Johannes & Kiesewetter, Dirk & Fochmann, Martin, 2014. "Affective reactions influence investment decisions: Evidence from a laboratory experiment with taxation," arqus Discussion Papers in Quantitative Tax Research 160, arqus - Arbeitskreis Quantitative Steuerlehre.

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