Tax-Rate Biases in Tax-Planning Decisions: Experimental Evidence

Publication: Working/Discussion PaperWU Working Paper

Abstract

This paper investigates how decision biases affect individuals’ tax decisions. We conduct four laboratory experiments with 303 students and 62 experienced tax professionals and find a systematic tax-rate bias in decisions under time constraints. More specifically, decision makers overestimate the relevance of less complex tax-rate information compared to more complex tax-base information, leading to suboptimal decision-making. We also find support for the theory of rational inattention as increasing the size of the tax-base effect mitigates the decision bias. However, we find that tax decisions are unaffected by participants’ professional experience: Students and highly experienced tax professionals are similarly prone to biased decision-making. Overall, our findings suggest that time constraints impede the use of complex information which can result in suboptimal tax planning.
Original languageEnglish
PublisherWU Vienna University of Economics and Business
DOIs
Publication statusPublished - 2019

Publication series

NameWU International Taxation Research Paper Series
No.2016-01

WU Working Paper Series

  • WU International Taxation Research Paper Series

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