Tax-Rate Biases in Tax Decisions: Experimental Evidence
51 Pages Posted: 29 Feb 2016 Last revised: 7 Mar 2022
Date Written: March 1, 2022
This study investigates biases in tax decisions. In a series of four laboratory experiments with 303 students and 62 tax professionals, we document a systematic tax-rate bias in decisions under time constraints. Specifically, decision-makers overestimate the relevance of less complex tax-rate information compared to more complex tax-base information. This behavior leads to suboptimal tax decisions. We also find that decision-making, on average, is unaffected by professional experience: students and tax professionals are similarly prone to tax-rate bias. However, senior tax professionals are more rationally inattentive. These decision-makers are less likely to exhibit a tax-rate bias when exhibiting such bias is relatively costly. Overall, our findings suggest that resource constraints impede the use of complex tax-base information, which results in suboptimal tax decisions. Interviews with senior tax professionals indicate potential for tax-rate biases in real-world tax decisions and thereby provide directions for future research.
Keywords: heuristics, decision bias, tax decisions, tax planning, rational inattention
JEL Classification: C91, D03, H32, K34, M21, M41
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