Choosing the wrong box? Behavioral frictions and limits of tax advice in tax regime choice

Kay Blaufus, Ralf Maiterth, Michael Milde and Caren Sureth

No 304, arqus Discussion Papers in Quantitative Tax Research from arqus - Arbeitskreis Quantitative Steuerlehre

Abstract: We examine behavioral frictions in entrepreneurs' tax planning when choosing between corporate and partnership taxation under a check-the-box rule. Using German tax return data, we show that only a small fraction of entrepreneurs opt for corporate taxation, despite substantial potential tax savings. A pre-registered incentivized online experiment demonstrates that complexity aversion, status quo bias, and misperception about the corporate tax burden-arising from the interaction of corporate and deferred dividend taxation-help explain the preference for partnership taxation. We further find that these behavioral frictions heighten liquidity risk under the corporate system, particularly in the face of unexpected cash flow needs. Finally, a survey of German tax advisors indicates that tax advice only partially mitigates these frictions. Some advisors misperceive the benefits of corporate taxation, while others anticipate client biases and therefore refrain from recommending the corporate tax system.

Keywords: Check-the-box; Legal Form; Tax Complexity; Tax Misperception; Behavioral Taxation; Tax Advice (search for similar items in EconPapers)
JEL-codes: D22 D91 H25 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-acc, nep-eur and nep-exp
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:arqudp:323941

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