Tax-Rate Biases in Tax-Planning Decisions: Experimental Evidence
51 Pages Posted: 29 Feb 2016 Last revised: 26 Oct 2019
Date Written: 2016
This paper investigates whether decision biases might reduce the quality of corporate taxplanning decisions. We conduct four laboratory experiments with 223 students and 62 tax professionals and show that time pressure induces a systematic tax-rate bias in tax-planning choices. Decision makers overestimate the relevance of less complex tax-rate information compared to more complex tax-base information. This results in 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, tax-planning choices 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 biases, tax-rate information, rational inattention, information complexity
JEL Classification: C91, D03, H32, K34, M21, M41
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