Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/59878 
Year of Publication: 
2012
Series/Report no.: 
arqus Discussion Paper No. 133
Publisher: 
Arbeitskreis Quantitative Steuerlehre (arqus), Berlin
Abstract: 
This paper studies behavioral responses to taxes in financial markets. It is motivated by recent puzzling empirical evidence of taxable municipal bond yields significantly exceeding the level expected relative to tax exempt bonds. A behavioral explanation is a tax aversion bias, the phenomenon that people perceive an additional burden associated with tax payments. We conduct market experiments on the trading of differently taxed and labeled securities. The data show an initial overvaluation of tax payments that diminishes when subjects gain experience. The tax deduction of expenses is valued more than an equivalent tax exemption of earnings. We find that the persistence of the tax aversion bias critically depends on the quality of feedback. This suggests that tax aversion predominantly occurs in one-time, unfamiliar financial decisions and to a lesser extent in repetitive choices.
Subjects: 
Behavioral finance
Behavioral taxation
Investor psychology
Tax aversion
Experiment
JEL: 
D03
G32
H20
H3
Document Type: 
Working Paper

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