The Biased Effect of Aggregated and Disaggregated Income Taxation on Investment Decisions

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

No 100025, FEMM Working Papers from Otto-von-Guericke University Magdeburg, Faculty of Economics and Management

Abstract: Income taxation may not only affect investment behavior by distorting payoffs, it may also have a more subtle, psychological effect, by biasing investors' perceptions of the financial consequences. In a laboratory experiment that allows us to vary the taxation method, while keeping the financial outcomes constant, we find clear evidence that aggregated income taxation (comparable to profit taxation) with complete loss deduction induces a sustained bias towards more risk-taking, while disaggregated income taxation (comparable to a transaction taxation with loss offset) does not. We suggest that this bias may be exploited to increase the volume of private investments by choosing aggregated income taxation, if investors are (too) risk-averse, and to decrease the volume and the risk by choosing disaggregated income taxation, if investors are (too) risk-seeking.

Keywords: tax perception; risk-taking behavior; distorting taxation (search for similar items in EconPapers)
JEL-codes: C91 D14 H24 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2010-12
New Economics Papers: this item is included in nep-acc, nep-exp and nep-pbe
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Citations: View citations in EconPapers (3)

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http://www.fww.ovgu.de/fww_media/femm/femm_2010/2010_25.pdf First version, 2010 (application/pdf)

Related works:
Journal Article: The Biased Effect of Aggregated and Disaggregated Income Taxation on Investment Decisions (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:mag:wpaper:100025

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