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Investment Behavior and the Biased Perception of Limited Loss Deduction in Income Taxation

  • 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)

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.ww.uni-magdeburg.de/fwwdeka/femm/a2010_Dateien/2010_04.pdf
File Function: First version, 2010
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Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 100004.

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Length: 30 pages
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:mag:wpaper:100004
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