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

  • Blaufus, Kay
  • Möhlmann, Axel

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.

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Paper provided by arqus - Arbeitskreis Quantitative Steuerlehre in its series arqus Discussion Papers in Quantitative Tax Research with number 133.

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Date of creation: 2012
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Handle: RePEc:zbw:arqudp:133
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  1. Rupert Sausgruber & Jean-Robert Tyran, 2005. "Testing the Mill hypothesis of fiscal illusion," Public Choice, Springer, vol. 122(1), pages 39-68, January.
  2. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
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  4. Loewenstein, George, 1999. "Experimental Economics from the Vantage-Point of Behavioural Economics," Economic Journal, Royal Economic Society, vol. 109(453), pages F23-34, February.
  5. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and taxation: theory and evidence," Finance and Economics Discussion Series 2009-11, Board of Governors of the Federal Reserve System (U.S.).
  6. Jordi Brandts & David J. Cooper, 2004. "Observability and Overcoming Coordination Failure in Organizations. An Experimental Study," Working Papers 143, Barcelona Graduate School of Economics.
  7. John List & Michael Haigh, 2005. "Do professional traders exhibit myopic loss aversion? An experimental analysis," Artefactual Field Experiments 00052, The Field Experiments Website.
  8. Löfgren, Åsa & Nordblom, Katarina, 2006. "Puzzling tax attitudes and labels," Working Papers in Economics 234, University of Gothenburg, Department of Economics.
  9. John List, 2003. "Does market experience eliminate market anomalies?," Natural Field Experiments 00297, The Field Experiments Website.
  10. Andrew Ang & Vineer Bhansali & Yuhang Xing, 2008. "Taxes on Tax-Exempt Bonds," NBER Working Papers 14496, National Bureau of Economic Research, Inc.
  11. 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.
  12. Klaus Abbink & Bettina Rockenbach, 2005. "Option Pricing by Students and Professional Traders: A Behavioural Investigation," Discussion Papers 2005-12, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  13. 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, vol. 31(3), pages 400-404, June.
  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.
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