Tax-Rate Biases in Tax Decisions: Experimental Evidence
50 Pages Posted: 29 Feb 2016 Last revised: 8 May 2020
Date Written: May 6, 2020
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.
Keywords: heuristics, decision bias, salience, tax-rate information, rational inattention
JEL Classification: C91, D03, H32, K34, M21, M41
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