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Investment behavior and the biased perception of limited loss deduction in income taxation

  • Fochmann, Martin
  • Kiesewetter, Dirk
  • Sadrieh, Abdolkarim

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.sciencedirect.com/science/article/pii/S0167268111002630
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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 81 (2012)
Issue (Month): 1 ()
Pages: 230-242

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Handle: RePEc:eee:jeborg:v:81:y:2012:i:1:p:230-242
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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