TY - JOUR

T1 - How Does the Deferral of a Distortive Tax Affect Overproduction and Asset Allocation?

AU - Blaufus, Kay

AU - Fochmann, Nadja

AU - Hundsdoerfer, Jochen

AU - Milde, Michael

N1 - Funding Information: We are grateful for the insightful comments and constructive suggestions of Christopher Koch (editor) and two anonymous reviewers. We appreciate helpful comments from participants at the 2021 Meeting of the VHB Business Taxation Section (Vienna). We particularly thank Matthias Sünwoldt for his co-authorshop on an earlier version of this paper (circulated under the title ‘Mental Accounting and the Timing of Taxation’). For helpful comments on this earlier version, we thank Ido Erev, Martin Fochmann, Martin Jacob, Eva Matthaei, Florian Morath, and the participants at the 2015 Conference of the German Association of Experimental Economics, the 2015 Closing Workshop on ‘Coping with Difficult Decisions – An Experimental Economics Perspective’, the 2016 WHU Accounting & Tax Research Seminar, the 2016 ZEW Workshop on ‘Lab Experiments in Public Economics’, the 2016 VHB Conference in Munich, and the 2016 EAA Conference in Maastricht. Kay Blaufus gratefully acknowledges financial support from Ernst & Young Stiftung e. V.

PY - 2023

Y1 - 2023

N2 - Deferred income taxation is widely used to encourage investment or saving. However, most income tax bases are more or less distortive (non-neutral). Using lab experiments, we find that the deferral of a distortive income taxation can result in substantial overproduction and less willingness to take risks. Subjects underweight the deferred tax burden and neglect the tax distortion because they act myopically and tend to make choices in isolation rather than simultaneously (choice bracketing). Despite opportunities to learn, the overproduction remains substantial. Additional analyses confirm that the observed misperception of deferred taxes is not caused by low tax salience or low effort, as providing additional accounting information on deferred taxes and introducing accountability reports do not change overproduction behavior. Only if we change the timing of the taxation from deferred to an economically equivalent immediate distortive tax system do overproduction and the effect on asset allocation almost disappear.

AB - Deferred income taxation is widely used to encourage investment or saving. However, most income tax bases are more or less distortive (non-neutral). Using lab experiments, we find that the deferral of a distortive income taxation can result in substantial overproduction and less willingness to take risks. Subjects underweight the deferred tax burden and neglect the tax distortion because they act myopically and tend to make choices in isolation rather than simultaneously (choice bracketing). Despite opportunities to learn, the overproduction remains substantial. Additional analyses confirm that the observed misperception of deferred taxes is not caused by low tax salience or low effort, as providing additional accounting information on deferred taxes and introducing accountability reports do not change overproduction behavior. Only if we change the timing of the taxation from deferred to an economically equivalent immediate distortive tax system do overproduction and the effect on asset allocation almost disappear.

KW - Choice bracketing

KW - Deferred taxation

KW - Distortive taxation

KW - Immediate taxation

KW - Overproduction

KW - Tax misperception

UR - http://www.scopus.com/inward/record.url?scp=85122894936&partnerID=8YFLogxK

U2 - 10.1080/09638180.2021.2018341

DO - 10.1080/09638180.2021.2018341

M3 - Article

AN - SCOPUS:85122894936

VL - 32

SP - 1157

EP - 1184

JO - European accounting review

JF - European accounting review

SN - 0963-8180

IS - 5

ER -