Intrinsic and extrinsic effects on behavioral tax biases in risky investment decisions

Martin Fochmann, Kristina Hemmerich and Dirk Kiesewetter

Journal of Economic Psychology, 2016, vol. 56, issue C, 218-231

Abstract: Individuals often do not take taxes correctly into account, which results in distorted or unexpected investments. We shed further light on the discussion of such behavioral tax perception biases by analyzing intrinsic and extrinsic effects on investment decisions. We study two dimensions: (1) the influence of emotions and perceived risk (individual dimension, intrinsic effects) and (2) the influence of available tax information by varying tax complexity and salience (tax system dimension, extrinsic effects). In our laboratory experiment, we construct the payoff structure such that the subjects are confronted with exactly the same choices in net terms in a situation with or without a capital gains tax. This design allows us to identify pure tax perception biases. We show that both dimensions are able to explain tax perception biases. In particular, we find evidence that perceived risk is lower and consequently willingness to take risk is higher with a capital gains tax (with full loss offset provision) than without taxation. Furthermore, this positive effect on risky investment is higher in a situation with a rather low level of tax information in which tax complexity is high and tax salience is low.

Keywords: Tax perception; Behavioral taxation; Risk taking behavior; Tax complexity; Tax salience; Affect; Perceived risk; Experimental economics (search for similar items in EconPapers)
JEL-codes: C91 D14 H24 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:joepsy:v:56:y:2016:i:c:p:218-231

DOI: 10.1016/j.joep.2016.07.003

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