Security returns and tax aversion bias: Behavioral responses to tax labels
AbstractThis paper studies behavioral responses to taxes in financial markets. It is motivated by recent puzzling empirical evidence of taxable municipal bond yields significantly exceeding the level expected relative to tax exempt bonds. A behavioral explanation is a tax aversion bias, the phenomenon that people perceive an additional burden associated with tax payments. We conduct market experiments on the trading of differently taxed and labeled securities. The data show an initial overvaluation of tax payments that diminishes when subjects gain experience. The tax deduction of expenses is valued more than an equivalent tax exemption of earnings. We find that the persistence of the tax aversion bias critically depends on the quality of feedback. This suggests that tax aversion predominantly occurs in one-time, unfamiliar financial decisions and to a lesser extent in repetitive choices. --
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Bibliographic InfoPaper provided by arqus - Arbeitskreis Quantitative Steuerlehre in its series arqus Discussion Papers in Quantitative Tax Research with number 133.
Date of creation: 2012
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Behavioral finance; Behavioral taxation; Investor psychology; Tax aversion; Experiment;
Find related papers by JEL classification:
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-29 (All new papers)
- NEP-CBE-2012-07-29 (Cognitive & Behavioural Economics)
- NEP-EXP-2012-07-29 (Experimental Economics)
- NEP-PBE-2012-07-29 (Public Economics)
- NEP-UPT-2012-07-29 (Utility Models & Prospect Theory)
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