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

Author

Listed:
  • 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.

Suggested Citation

  • Martin Fochmann & Dirk Kiesewetter & Abdolkarim Sadrieh, 2010. "The Biased Effect of Aggregated and Disaggregated Income Taxation on Investment Decisions," FEMM Working Papers 100025, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    • Handle: RePEc:mag:wpaper:100025
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    References listed on IDEAS

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    1. Blumkin, Tomer & Ruffle, Bradley J. & Ganun, Yosef, 2012. "Are income and consumption taxes ever really equivalent? Evidence from a real-effort experiment with real goods," European Economic Review, Elsevier, vol. 56(6), pages 1200-1219.
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    7. Evsey D. Domar & Richard A. Musgrave, 1944. "Proportional Income Taxation and Risk-Taking," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 58(3), pages 388-422.
    8. Kay Blaufus & Renate Ortlieb, 2009. "Is Simple Better? A Conjoint Analysis of the Effects of Tax Complexity on Employee Preferences Concerning Company Pension Plans," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 61(1), pages 60-83, January.
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    Citations

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    Cited by:

    1. Ackermann, Hagen & Fochmann, Martin, 2014. "The effect of straight-line and accelerated depreciation rules on risky investment decisions: An experimental study," arqus Discussion Papers in Quantitative Tax Research 158, arqus - Arbeitskreis Quantitative Steuerlehre.
    2. Fochmann, Martin & Hemmerich, Kristina & Kiesewetter, Dirk, 2016. "Intrinsic and extrinsic effects on behavioral tax biases in risky investment decisions," Journal of Economic Psychology, Elsevier, vol. 56(C), pages 218-231.
    3. Fochmann, Martin & Hemmerich, Kristina, 2014. "Real tax effects and tax perception effects in decisions on asset allocation," arqus Discussion Papers in Quantitative Tax Research 156, arqus - Arbeitskreis Quantitative Steuerlehre.
    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. Hagen Ackermann & Martin Fochmann & Nadja Wolf, 2016. "The Effect of Straight-Line and Accelerated Depreciation Rules on Risky Investment Decisions—An Experimental Study," IJFS, MDPI, vol. 4(4), pages 1-26, October.

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    More about this item

    Keywords

    tax perception; risk-taking behavior; distorting taxation;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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