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

Posted: 16 Oct 2010 Last revised: 13 May 2014

See all articles by Martin Fochmann

Martin Fochmann

Free University of Berlin; University of Cologne

Dirk Kiesewetter

University of Würzburg

Abdolkarim Sadrieh

University of Magdeburg

Date Written: 2012

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

JEL Classification: C9l, Dl4, H24

Suggested Citation

Fochmann, Martin and Kiesewetter, Dirk and Sadrieh, Abdolkarim, Investment Behavior and the Biased Perception of Limited Loss Deduction in Income Taxation (2012). Journal of Economic Behavior and Organization, Vol. 81, No. 1, 2012. Available at SSRN: https://ssrn.com/abstract=1692786 or http://dx.doi.org/10.2139/ssrn.1692786

Martin Fochmann

Free University of Berlin ( email )

Thielallee 73
Accounting and Taxation
Berlin, 14195
Germany

University of Cologne ( email )

Albertus-Magnus-Platz
Behavioral Accounting/Taxation/Finance
Cologne, 50923
Germany

HOME PAGE: http://www.taxation.uni-koeln.de/de/team/prof-dr-martin-fochmann/

Dirk Kiesewetter (Contact Author)

University of Würzburg ( email )

Sanderring 2
Würzburg, D-97070
Germany

Abdolkarim Sadrieh

University of Magdeburg ( email )

Faculty of Economics and Management
Postbox 4120
39016 Magdeburg
Germany

HOME PAGE: http://www.ww.uni-magdeburg.de

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