Complex Tax Incentives

Johannes Abeler and Simon Jäger

American Economic Journal: Economic Policy, 2015, vol. 7, issue 3, 1-28

Abstract: How does complexity affect people's reaction to tax changes? To answer this question, we conduct an experiment in which subjects work for a piece rate and face taxes. One treatment features a simple tax system, the other a complex one. Subjects' economic incentives are identical across treatments. We introduce the same sequence of additional taxes in both treatments. Subjects in the complex treatment underreact to new taxes; some ignore new taxes entirely. The underreaction is stronger for subjects with lower cognitive ability. Contrary to predictions from models of rational inattention, subjects are equally likely to ignore large or small incentive changes (JEL D14, H24, H31)

JEL-codes: D14 H24 H31 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/pol.20130137
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