Complex Tax Incentives: An Experimental Investigation

Johannes Abeler and Simon Jäger

No 7373, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: How does the tax system's complexity affect people's reaction to tax changes? To answer this question, we conduct a real-effort experiment in which subjects receive a piece rate and face a set of taxes. In one treatment the tax system is simple; in the other treatment it is highly complex. The payoff-maximizing effort level and the incentives around this optimum are, however, identical across treatments. We then introduce the same sequence of additional tax rules in both treatments. We find that subjects in the complex treatment adjust their effort provision less in response to a new tax than subjects in the simple treatment. Many subjects in the complex treatment even ignore the new rule entirely, repeating their previous choice. Contrary to predictions from models of rational inattention, we find no evidence that subjects are less likely to ignore larger changes in incentives. Our results suggest that the effect of a newly introduced tax will be attenuated in a more complex tax system.

Keywords: complexity; taxation; attention; salience; laboratory experiment (search for similar items in EconPapers)
JEL-codes: C91 D03 H31 J22 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2013-04
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-hrm, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Published - revised version published as 'Complex Tax Incentives' in: American Economic Journal: Economic Policy , 2015, 7 (3), 1-28

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Working Paper: Complex Tax Incentives - An Experimental Investigation (2013)
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