Complex Tax Incentives: An Experimental Investigation

Posted: 11 May 2013

See all articles by Johannes Abeler

Johannes Abeler

IZA Institute of Labor Economics; University of Nottingham

Simon Jäger

Massachusetts Institute of Technology (MIT); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics; briq- Institute on Behavior & Inequality

Abstract

How does the tax system's complexity affect people's reaction to tax changes? To answer this question, we conduct a real-effort experiment in which subjects receive a piece rate and face a set of taxes. In one treatment the tax system is simple; in the other treatment it is highly complex. The payoff-maximizing effort level and the incentives around this optimum are, however, identical across treatments. We then introduce the same sequence of additional tax rules in both treatments.We find that subjects in the complex treatment adjust their effort provision less in response to a new tax than subjects in the simple treatment. Many subjects in the complex treatment even ignore the new rule entirely, repeating their previous choice. Contrary to predictions from models of rational inattention, we find no evidence that subjects are less likely to ignore larger changes in incentives. Our results suggest that the effect of a newly introduced tax will be attenuated in a more complex tax system.

Keywords: complexity, taxation, attention, salience, laboratory experiment

JEL Classification: C91, D03, H31, J22

Suggested Citation

Abeler, Johannes and Jäger, Simon, Complex Tax Incentives: An Experimental Investigation. IZA Discussion Paper No. 7373. Available at SSRN: https://ssrn.com/abstract=2263649

Johannes Abeler (Contact Author)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

University of Nottingham

University Park
Nottingham, NG8 1BB
United Kingdom

Simon Jäger

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

briq- Institute on Behavior & Inequality ( email )

Schaumburg-Lippe-Straße 5-9
Bonn, 53113
Germany

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