TY - BOOK

T1 - Economic decision making and tax policy uncertainty

AU - Spaeth, Alexandra

PY - 2024/4/3

Y1 - 2024/4/3

N2 - This dissertation consists of three papers on economic decision making and tax policy uncertainty. The first two papers focus on retirement savings and behavioral effects. The third contribution examines the effect of tax policy uncertainty on effort and derives implications for welfare. In the first paper, we investigate whether reducing the income tax rate increases savings. Uncertainty is incorporated as an instrument to increase the salience of the future pension tax rate. In a series of online experiments, we find that reducing the income tax rate on pensions has almost no significant effect on savings behavior. This holds even if we increase the salience of the future pension tax rate. However, when we vary the current tax rate at which savings are deducted, subjects adjust their savings. This suggests that individuals neglect the level of income taxes on pensions due to behavioral biases (myopia or confirmation bias). The results indicate that governments should not rely on lower income taxes on pensions but instead increase incentives directly in the savings period to increase retirement savings. The second paper examines the economic effects of offering both a pension plan that imposes immediate taxation on pension contributions (Roth account) and a plan that defers taxation until retirement (Traditional account). In the case of deferred taxation, we take into consideration tax rate uncertainty. The offer of two accounts increases retirement savings, suggesting that the availability of two accounts signals a social norm stimulating higher savings. However, satisfaction with the consumption decision does not improve due to decision complexity. Many individuals prefer Roth accounts due to the perceived simplicity, even though they are economically inferior. Compared to rational choice theory, individuals save either too much with both accounts or too little in Traditional accounts. Savings in Roth accounts align with the benchmark. The third paper examines the effect of tax policy uncertainty in the sense of tax base risk on effort in an agency model with risk-averse principal and agent. Under the assumption of an unobservable effort of the agent, the agent’s variable share of profit acts as an instrument to share risk and incentivize effort. In this setting, a counter-cyclical tax base policy at the level of the agent or a pro-cyclical one at the level of the principal can raise the agent’s variable share of profit, whose increase raises the effort of the agent. This finding supports a pro-cyclical tax policy at the company level (principal) and a counter-cyclical one at the employee level (agent). Tax policy uncertainty in the sense of tax base risk enables and reinforces these effects. Moreover, under the assumption of a counter-cyclical tax base policy at the agent’s level, tax base risk at the level of the agent up to a certain level increases overall utility and thus welfare.

AB - This dissertation consists of three papers on economic decision making and tax policy uncertainty. The first two papers focus on retirement savings and behavioral effects. The third contribution examines the effect of tax policy uncertainty on effort and derives implications for welfare. In the first paper, we investigate whether reducing the income tax rate increases savings. Uncertainty is incorporated as an instrument to increase the salience of the future pension tax rate. In a series of online experiments, we find that reducing the income tax rate on pensions has almost no significant effect on savings behavior. This holds even if we increase the salience of the future pension tax rate. However, when we vary the current tax rate at which savings are deducted, subjects adjust their savings. This suggests that individuals neglect the level of income taxes on pensions due to behavioral biases (myopia or confirmation bias). The results indicate that governments should not rely on lower income taxes on pensions but instead increase incentives directly in the savings period to increase retirement savings. The second paper examines the economic effects of offering both a pension plan that imposes immediate taxation on pension contributions (Roth account) and a plan that defers taxation until retirement (Traditional account). In the case of deferred taxation, we take into consideration tax rate uncertainty. The offer of two accounts increases retirement savings, suggesting that the availability of two accounts signals a social norm stimulating higher savings. However, satisfaction with the consumption decision does not improve due to decision complexity. Many individuals prefer Roth accounts due to the perceived simplicity, even though they are economically inferior. Compared to rational choice theory, individuals save either too much with both accounts or too little in Traditional accounts. Savings in Roth accounts align with the benchmark. The third paper examines the effect of tax policy uncertainty in the sense of tax base risk on effort in an agency model with risk-averse principal and agent. Under the assumption of an unobservable effort of the agent, the agent’s variable share of profit acts as an instrument to share risk and incentivize effort. In this setting, a counter-cyclical tax base policy at the level of the agent or a pro-cyclical one at the level of the principal can raise the agent’s variable share of profit, whose increase raises the effort of the agent. This finding supports a pro-cyclical tax policy at the company level (principal) and a counter-cyclical one at the employee level (agent). Tax policy uncertainty in the sense of tax base risk enables and reinforces these effects. Moreover, under the assumption of a counter-cyclical tax base policy at the agent’s level, tax base risk at the level of the agent up to a certain level increases overall utility and thus welfare.

U2 - 10.15488/16830

DO - 10.15488/16830

M3 - Doctoral thesis

CY - Hannover

ER -