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

Kay Blaufus and Axel Möhlmann

No 133, arqus Discussion Papers in Quantitative Tax Research from arqus - Arbeitskreis Quantitative Steuerlehre

Abstract: 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.

Keywords: Behavioral finance; Behavioral taxation; Investor psychology; Tax aversion; Experiment (search for similar items in EconPapers)
JEL-codes: D03 G32 H20 H3 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-pbe and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Security Returns and Tax Aversion Bias: Behavioral Responses to Tax Labels (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:arqudp:133

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