IDEAS home Printed from https://ideas.repec.org/p/zbw/arqudp/133.html
   My bibliography  Save this paper

Security returns and tax aversion bias: Behavioral responses to tax labels

Author

Listed:
  • Blaufus, Kay
  • Möhlmann, Axel

Abstract

This 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.

Suggested Citation

  • Blaufus, Kay & Möhlmann, Axel, 2012. "Security returns and tax aversion bias: Behavioral responses to tax labels," arqus Discussion Papers in Quantitative Tax Research 133, arqus - Arbeitskreis Quantitative Steuerlehre.
  • Handle: RePEc:zbw:arqudp:133
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/59878/1/719202701.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Löfgren, Åsa & Nordblom, Katarina, 2006. "Puzzling tax attitudes and labels," Working Papers in Economics 234, University of Gothenburg, Department of Economics.
    2. Lozza, Edoardo & Carrera, Sonia & Bosio, A. Claudio, 2010. "Perceptions and outcomes of a fiscal bonus: Framing effects on evaluations and usage intentions," Journal of Economic Psychology, Elsevier, pages 400-404.
    3. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, pages 1145-1177.
    4. Michael S. Haigh & John A. List, 2005. "Do Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis," Journal of Finance, American Finance Association, vol. 60(1), pages 523-534, February.
    5. Klaus Abbink & Bettina Rockenbach, 2006. "Option pricing by students and professional traders: a behavioural investigation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(6), pages 497-510.
    6. Andrew Ang & Vineer Bhansali & Yuhang Xing, 2010. "Taxes on Tax-Exempt Bonds," Journal of Finance, American Finance Association, vol. 65(2), pages 565-601, April.
    7. John A. List, 2003. "Does Market Experience Eliminate Market Anomalies?," The Quarterly Journal of Economics, Oxford University Press, pages 41-71.
    8. Jordi Brandts & David Cooper, 2006. "Observability and overcoming coordination failure in organizations: An experimental study," Experimental Economics, Springer;Economic Science Association, pages 407-423.
    9. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    10. Rupert Sausgruber & Jean-Robert Tyran, 2005. "Testing the Mill hypothesis of fiscal illusion," Public Choice, Springer, pages 39-68.
    11. Loewenstein, George, 1999. "Experimental Economics from the Vantage-Point of Behavioural Economics," Economic Journal, Royal Economic Society, vol. 109(453), pages 23-34, February.
    12. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
    13. Kirchler, Erich, 1998. "Differential representations of taxes: Analysis of free associations and judgments of five employment groups," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 27(1), pages 117-131.
    14. Kallbekken, Steffen & Kroll, Stephan & Cherry, Todd L., 2011. "Do you not like Pigou, or do you not understand him? Tax aversion and revenue recycling in the lab," Journal of Environmental Economics and Management, Elsevier, vol. 62(1), pages 53-64, July.
    15. Åsa Lofgren & Katarina Nordblom, 2009. "Puzzling tax attitudes and labels," Applied Economics Letters, Taylor & Francis Journals, vol. 16(18), pages 1809-1812.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Martin Fochmann & Arne Kleinstück, 2012. "Steueraversion - Sind wir wirklich bereit auf Einkommen zu verzichten, nur um Steuern zu sparen?," FEMM Working Papers 120024, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.

    More about this item

    Keywords

    Behavioral finance; Behavioral taxation; Investor psychology; Tax aversion; Experiment;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:arqudp:133. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics). General contact details of provider: http://www.arqus.info/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.