Tax Loss Offset Restrictions and Biased Perception of Risky Investments

59 Pages Posted: 3 Oct 2017

See all articles by Annika Mehrmann

Annika Mehrmann

University of Paderborn

Caren Sureth-Sloane

Paderborn University; Vienna University of Economics and Business

Date Written: October 2, 2017


We investigate how tax loss offset restrictions affect an investor’s evaluation of risky investments under bounded rationality. We analytically identify behavioral tax effects for different levels of loss offset restrictions, tax rate and prospect theoretical biases (loss aversion, probability weighting and reference dependence) and find tax loss offset restrictions significantly bias investor perception, even more heavily than the tax rate. If loss offset restrictions are rather generous, investors are very loss averse or assign a huge weight to loss probabilities, taxation is likely to increase the preference value of risky investments (behavioral tax paradox). Surprisingly, the identified significant perception biases of tax loss offset restrictions occur under both high and low tax rates and thus are relatively insensitive to tax rate changes. Finally, we identify huge differences in behavioral tax effects across countries indicating that tax loss offset restrictions crucially determine the perceived tax quality of a country for risky investments. Our analysis is relevant for policy makers discussing future tax reforms as well as for investors assessing risky investment opportunities.

Keywords: asymmetric taxation, investment decisions, loss offset restrictions, perception bias, risk-taking, tax effects, tax losses, prospect theory, behavioral taxation

JEL Classification: D81, D91, H21, H25

Suggested Citation

Mehrmann, Annika and Sureth-Sloane, Caren, Tax Loss Offset Restrictions and Biased Perception of Risky Investments (October 2, 2017). WU International Taxation Research Paper Series No. 2017-11. Available at SSRN: or

Annika Mehrmann

University of Paderborn ( email )

Warburger Str. 100
D-33098 Paderborn

Caren Sureth-Sloane (Contact Author)

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020

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