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Income Taxes and Risky Investment Decisions: An Experiment on Behavioral Tax Biases

Author

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  • Martin Fochmann
  • Kristina Hemmerich

Abstract

We design a controlled experiment to examine investment behavior when a proportional income tax (with and without full loss offset) is introduced. Our design enables us to disentangle tax effects predicted by standard neoclassical theory and behavioral tax biases that cannot be predicted by this theory. We observe that investment behavior can be heavily distorted by behavioral tax biases and is consequently inconsistent with theoretical predictions. However, if we isolate these effects, we find support for the theory. We argue that the unpredicted behavior is a result of a tax-induced cognitive load variation.

Suggested Citation

  • Martin Fochmann & Kristina Hemmerich, 2018. "Income Taxes and Risky Investment Decisions: An Experiment on Behavioral Tax Biases," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 174(4), pages 651-688, December.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201812)174:4_651:itarid_2.0.tx_2-g
    DOI: 10.1628/jite-2018-0002
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    More about this item

    Keywords

    taxation; Domar-Musgrave effect; investment decisions; tax perception; risktaking behavior; behavioral 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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