Tax Loss Offset Restrictions and Biased Perception of Risky Investments

Annika Mehrmann, Caren Sureth-Sloane

Publication: Working/Discussion PaperWU Working Paper


We investigate how tax loss offset restrictions affect an investor's evaluation of risky investments
under bounded rationality. We analytically identify behavioral tax effects for different levels
of loss offset restrictions, tax rate and prospect theoretical biases (loss aversion, probability
weighting and reference dependence) and find tax loss offset restrictions significantly bias investor
perception, even more heavily than the tax rate. If loss offset restrictions are rather generous, investors
are very loss averse or assign a huge weight to loss probabilities, taxation is likely to increase the
preference value of risky investments (behavioral tax paradox). Surprisingly, the identified significant
perception biases of tax loss offset restrictions occur under both high and low tax rates and thus are
relatively insensitive to tax rate changes. Finally, we identify huge differences in behavioral tax effects
across countries indicating that tax loss offset restrictions crucially determine the perceived tax
quality of a country for risky investments. Our analysis is relevant for policy makers discussing future
tax reforms as well as for investors assessing risky investment opportunities.
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
Publication statusPublished - 1 Oct 2017

Publication series

NameWU International Taxation Research Paper Series

WU Working Paper Series

  • WU International Taxation Research Paper Series

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