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Real tax effects and tax perception effects in decisions on asset allocation


  • Fochmann, Martin
  • Hemmerich, Kristina


We test the predictions of the theoretical literature initiated by the study of Domar and Musgrave (1944) with a laboratory experiment in which subjects have to decide on the composition of an asset portfolio. Our simple design enables us to distinguish between Real Tax Effects and Perception Effects when a proportional income tax, with and without a full loss offset provision, is introduced. Observed investment behavior is partially inconsistent with the theoretical predictions if we do not control for the Perception Effects. However, if we consider these effects, we find support for the theory. The isolated Perception Effects can explain the unexpected behavior observed in previous studies and has both scientific and political implications.

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  • Fochmann, Martin & Hemmerich, Kristina, 2014. "Real tax effects and tax perception effects in decisions on asset allocation," arqus Discussion Papers in Quantitative Tax Research 156, arqus - Arbeitskreis Quantitative Steuerlehre.
  • Handle: RePEc:zbw:arqudp:156

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    References listed on IDEAS

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    Cited by:

    1. Fochmann, Martin & Hemmerich, Kristina & Kiesewetter, Dirk, 2016. "Intrinsic and extrinsic effects on behavioral tax biases in risky investment decisions," Journal of Economic Psychology, Elsevier, vol. 56(C), pages 218-231.
    2. Hagen Ackermann & Martin Fochmann & Nadja Wolf, 2016. "The Effect of Straight-Line and Accelerated Depreciation Rules on Risky Investment Decisions—An Experimental Study," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 4(4), pages 1-26, October.
    3. Fochmann, Martin & Hemmerich, Kristina & Kiesewetter, Dirk, 2015. "Intrinsic and extrinsic effects on behavioral tax biases in risky investment decisions," arqus Discussion Papers in Quantitative Tax Research 196, arqus - Arbeitskreis Quantitative Steuerlehre.

    More about this item


    Taxation; Domar-Musgrave Effect; Tax Perception; Risk Taking Behavior; Portfolio Choice; Behavioral Taxation;

    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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