Real Tax Effects and Tax Perception Effects in Decisions on Asset Allocation

50 Pages Posted: 14 May 2014

See all articles by Martin Fochmann

Martin Fochmann

Free University of Berlin; University of Cologne

Kristina Hemmerich

University of Würzburg

Multiple version iconThere are 2 versions of this paper

Date Written: April 10, 2014

Abstract

We test the predictions of the theoretical literature initiated by the study of Domar and Musgrave (1944) with a laboratory experiment in which subjects have to decide on the composition of an asset portfolio. Our simple design enables us to distinguish between Real Tax Effects and Perception Effects when a proportional income tax, with and without a full loss offset provision, is introduced. Observed investment behavior is partially inconsistent with the theoretical predictions if we do not control for the Perception Effects. However, if we consider these effects, we find support for the theory. The isolated Perception Effects can explain the unexpected behavior observed in previous studies and has both scientific and political implications.

Keywords: Taxation, Domar-Musgrave Effect, Tax Perception, Risk Taking Behavior, Portfolio Choice, Behavioral Taxation

JEL Classification: C91, D14, H24

Suggested Citation

Fochmann, Martin and Hemmerich, Kristina, Real Tax Effects and Tax Perception Effects in Decisions on Asset Allocation (April 10, 2014). Available at SSRN: https://ssrn.com/abstract=2435935 or http://dx.doi.org/10.2139/ssrn.2435935

Martin Fochmann (Contact Author)

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/

Kristina Hemmerich

University of Würzburg ( email )

Sanderring 2
Würzburg, D-97070
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
61
Abstract Views
912
rank
265,328
PlumX Metrics