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Behavioral Effects of Withholding Taxes on Labor Supply

Author

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  • Johannes Becker

    (University of Muenster)

  • Jonas Fooken

    (School of Economics, The University of Queensland)

  • Melanie Steinhoff

    (University of Muenster)

Abstract

Income tax collection in most advanced economies uses third-party reporting and withholding at the employer level before the employee receives her wage income. Since withholding taxes do not necessarily reflect the true effective tax burden, they may give false signals on the net-of-tax pay. We report results of laboratory experiments in which labor supply effects of such misperceptions are tested. Withholding taxes (and resulting tax refunds) should be behaviorally neutral in the experiment, but our results suggest that withholding taxes reduce effort and tax adjustments lead to adjustments of effort for our most relevant group of participants, those motivated by monetary incentives. This indicates that withholding taxes may be behaviorally relevant and deserve attention of policy-makers

Suggested Citation

  • Johannes Becker & Jonas Fooken & Melanie Steinhoff, 2018. "Behavioral Effects of Withholding Taxes on Labor Supply," Discussion Papers Series 589, School of Economics, University of Queensland, Australia.
    • Handle: RePEc:qld:uq2004:589
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    File URL: https://economics.uq.edu.au/files/46290/589.pdf
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    Cited by:

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    2. Vossler, Christian A. & McKee, Michael & Bruner, David M., 2021. "Behavioral effects of tax withholding on tax compliance: Implications for information initiatives," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 301-319.

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    More about this item

    Keywords

    Withholding taxes; experiment; tax perceptions;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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