Complex Tax Incentives - An Experimental Investigation

48 Pages Posted: 16 May 2013

See all articles by Johannes Abeler

Johannes Abeler

University of Oxford

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

Date Written: May 15, 2013

Abstract

How does tax complexity affect people’s reaction to tax changes? To answer this question, we conduct an experiment in which subjects work for a piece rate and face taxes. One treatment features a simple, the other a complex tax system. The payoff-maximizing effort level and the incentives around this optimum are, however, identical across treatments. We introduce the same sequence of additional taxes in both treatments. Subjects in the complex treatment underreact to new taxes; some ignore new taxes entirely. Contrary to predictions from models of rational inattention, subjects are equally likely to ignore large or small incentive changes.

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

JEL Classification: C910, D030, H310, J220

Suggested Citation

Abeler, Johannes and Jäger, Simon, Complex Tax Incentives - An Experimental Investigation (May 15, 2013). CESifo Working Paper Series No. 4231. Available at SSRN: https://ssrn.com/abstract=2265293

Johannes Abeler (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
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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