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Complex Tax Incentives: An Experimental Investigation

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  • Abeler, Johannes

    () (University of Oxford)

  • Jäger, Simon

    () (Massachusetts Institute of Technology)

Abstract

How does the tax system's complexity affect people's reaction to tax changes? To answer this question, we conduct a real-effort experiment in which subjects receive a piece rate and face a set of taxes. In one treatment the tax system is simple; in the other treatment it is highly complex. The payoff-maximizing effort level and the incentives around this optimum are, however, identical across treatments. We then introduce the same sequence of additional tax rules in both treatments. We find that subjects in the complex treatment adjust their effort provision less in response to a new tax than subjects in the simple treatment. Many subjects in the complex treatment even ignore the new rule entirely, repeating their previous choice. Contrary to predictions from models of rational inattention, we find no evidence that subjects are less likely to ignore larger changes in incentives. Our results suggest that the effect of a newly introduced tax will be attenuated in a more complex tax system.

Suggested Citation

  • Abeler, Johannes & Jäger, Simon, 2013. "Complex Tax Incentives: An Experimental Investigation," IZA Discussion Papers 7373, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp7373
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Radu Vranceanu & Angela Sutan & Delphine Dubart, 2016. "Discontent with taxes and the timing of taxation : experimental evidence," Working Papers hal-01282724, HAL.
    2. Kenan Kalaycı & Marta Serra-Garcia, 2016. "Complexity and biases," Experimental Economics, Springer;Economic Science Association, vol. 19(1), pages 31-50, March.
    3. Doerrenberg, Philipp & Duncan, Denvil, 2014. "Tax Incidence in the Presence of Tax Evasion," IZA Discussion Papers 8137, Institute for the Study of Labor (IZA).
    4. Kosonen, Tuomas & Ropponen, Olli, 2015. "The role of information in tax compliance: Evidence from a natural field experiment," Economics Letters, Elsevier, vol. 129(C), pages 18-21.
    5. Carpenter, Jeffrey & Matthews, Peter Hans & Tabb, Benjamin, 2016. "Progressive taxation in a tournament economy," Journal of Public Economics, Elsevier, vol. 143(C), pages 64-72.
    6. De Neve, Jan-Emmanuel & Lamberton, Cait & Norton, Michael I., 2014. "Eliciting taxpayer preferences increases tax compliance," LSE Research Online Documents on Economics 60277, London School of Economics and Political Science, LSE Library.

    More about this item

    Keywords

    taxation; attention; salience; laboratory experiment; complexity;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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