Investment Behavior and the Biased Perception of Limited Loss Deduction in Income Taxation

Martin Fochmann (), Dirk Kiesewetter and Abdolkarim Sadrieh
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Martin Fochmann: Faculty of Economics and Management, Otto-von-Guericke University Magdeburg

No 100004, FEMM Working Papers from Otto-von-Guericke University Magdeburg, Faculty of Economics and Management

Abstract: We use a laboratory experiment to study the extent to which investors’ choices are affected by limited loss deduction in income taxation. We first compare investment behavior in the no tax baseline to a tax control setting, in which the income from investments is taxed. We find that investors significantly reduce their risk-taking as predicted by theory. Next we compare the baseline investment choices to choices under three different types of income taxation. We observe that risk-taking is significantly increased with partial and with capped loss deduction, but is unaffected by a tax system that allows no loss deduction. Since in all these treatments the after tax outcomes of the prospects were identical, we conjecture that investors have a positively biased perception of partial and capped loss deduction that promotes their willingness to take risks.

Keywords: risk-taking behavior; distorting taxation; tax perception (search for similar items in EconPapers)
JEL-codes: C91 D14 H24 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2010-01
New Economics Papers: this item is included in nep-acc, nep-exp and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Investment behavior and the biased perception of limited loss deduction in income taxation (2012)
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