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The Biased Effect of Aggregated and Disaggregated Income Taxation on Investment Decisions

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Author Info

  • 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

Income taxation may not only affect investment behavior by distorting payoffs, it may also have a more subtle, psychological effect, by biasing investors' perceptions of the financial consequences. In a laboratory experiment that allows us to vary the taxation method, while keeping the financial outcomes constant, we find clear evidence that aggregated income taxation (comparable to profit taxation) with complete loss deduction induces a sustained bias towards more risk-taking, while disaggregated income taxation (comparable to a transaction taxation with loss offset) does not. We suggest that this bias may be exploited to increase the volume of private investments by choosing aggregated income taxation, if investors are (too) risk-averse, and to decrease the volume and the risk by choosing disaggregated income taxation, if investors are (too) risk-seeking.

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File URL: http://www.fww.ovgu.de/fww_media/femm/femm_2010/2010_25.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 100025.

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Length: 34 pages
Date of creation: Dec 2010
Date of revision:
Handle: RePEc:mag:wpaper:100025

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

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Cited by:
  1. 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.

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