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The perception of income taxation on risky investments: An experimental analysis of different methods of loss compensation

  • Fochmann, Martin
  • Kiesewetter, Dirk
  • Sadrieh, Abdolkarim

We analyze the effect of income taxation with limited loss deduction on investment decisions. An experiment with five treatments was conducted, one without taxation as a reference and four with taxation and limited loss compensation. The participants' task was to repeatedly choose one out of two risky investment opportunities. Earnings from the experiment depended on the payoffs of the participant's investments. Our results reveal that subjects do not only look at gross payoffs but also take taxes into account in their decisions. The experimental setup made sure that a rational participant who correctly perceives the effect of the different loss offset rules would take exactly the same decisions with and without taxation. Nevertheless, we find out that individuals tend to overestimate the value of loss compensation rules which offer less than a complete loss offset.

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Paper provided by arqus - Arbeitskreis Quantitative Steuerlehre in its series arqus Discussion Papers in Quantitative Tax Research with number 92.

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Date of creation: 2009
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Handle: RePEc:zbw:arqudp:92
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  1. Ruffle, Bradley J., 2005. "Tax and subsidy incidence equivalence theories: experimental evidence from competitive markets," Journal of Public Economics, Elsevier, vol. 89(8), pages 1519-1542, August.
  2. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  3. Peter Brooks & Horst Zank, 2005. "Loss Averse Behavior," Journal of Risk and Uncertainty, Springer, vol. 31(3), pages 301-325, December.
  4. Rupert Sausgruber & Jean-Robert Tyran, 2008. "Tax Salience, Voting, and Deliberation," Discussion Papers 08-21, University of Copenhagen. Department of Economics.
  5. Rupert Sausgruber & Jean-Robert Tyran, . "Testing the Mill hypothesis of fiscal illusion," Discussion Papers 04-18, University of Copenhagen. Department of Economics, revised Sep 2004.
  6. Fujii, Edwin T & Hawley, Clifford B, 1988. "On the Accuracy of Tax Perceptions," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 344-47, May.
  7. Jeremy Clark, 2002. "House Money Effects in Public Good Experiments," Experimental Economics, Springer, vol. 5(3), pages 223-231, December.
  8. Lucy Ackert & Narat Charupat & Bryan Church & Richard Deaves, 2006. "An experimental examination of the house money effect in a multi-period setting," Experimental Economics, Springer, vol. 9(1), pages 5-16, April.
  9. Schmidt, Ulrich & Traub, Stefan, 2002. " An Experimental Test of Loss Aversion," Journal of Risk and Uncertainty, Springer, vol. 25(3), pages 233-49, November.
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