Economics at your fingertips  

Overreaction to capital taxation in saving decisions

Kelin Lu

Journal of Economic Dynamics and Control, 2022, vol. 144, issue C

Abstract: This paper studies the response of saving decisions to two alternative types of capital taxation: the wealth tax and the capital income tax. First, we conducted a lifecycle experiment using Amazon MTurk, wherein subjects made dynamic saving decisions. Subjects exhibited an overreaction to wealth taxes but not to capital income taxes: subjects’ savings decreased more with the introduction of a wealth tax than with a financially equivalent drop in capital returns. Second, we built a parsimonious behavioral model of individual optimization to characterize this overreaction and illustrate its welfare implications. Finally, additional treatments began to explore the root cause of this overreaction bias. We ruled out the explanation that the intrinsic aversion to paying wealth taxes drives overreaction. Instead, overreaction seems to be driven by subjects’ incorrect understanding of the effects of wealth taxes on their savings.

Keywords: Capital income tax; Wealth tax; Tax overreaction; Behavioral and experimental economics (search for similar items in EconPapers)
JEL-codes: C91 D15 D91 E21 H21 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.jedc.2022.104541

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

Page updated 2023-08-12
Handle: RePEc:eee:dyncon:v:144:y:2022:i:c:s0165188922002457