Complex Tax Incentives: An Experimental Investigation

Arbeitspapier

How does the tax system's complexity affect people's reaction to tax changes? To answer this question, we conduct a real-effort experiment in which subjects receive a piece rate and face a set of taxes. In one treatment the tax system is simple; in the other treatment it is highly complex. The payoff-maximizing effort level and the incentives around this optimum are, however, identical across treatments. We then introduce the same sequence of additional tax rules in both treatments. We find that subjects in the complex treatment adjust their effort provision less in response to a new tax than subjects in the simple treatment. Many subjects in the complex treatment even ignore the new rule entirely, repeating their previous choice. Contrary to predictions from models of rational inattention, we find no evidence that subjects are less likely to ignore larger changes in incentives. Our results suggest that the effect of a newly introduced tax will be attenuated in a more complex tax system.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 7373

Classification and Topics

• Classification: Wirtschaft ; Design of Experiments: Laboratory, Individual ; Fiscal Policies and Behavior of Economic Agents: Household ; Time Allocation and Labor Supply
• Subject: complexity ; taxation ; attention ; salience ; laboratory experiment

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Abeler, Johannes ; Jäger, Simon
• Event: Veröffentlichung
• (who): Institute for the Study of Labor (IZA)
• (where): Bonn
• (when): 2013

Further information

• Handle: http://hdl.handle.net/10419/80615
• Last update: 10.03.2025, 11:41 AM CET