Complex Tax Incentives: An Experimental Investigation

By Johannes Abeler, Simon Jäger. Social Science Research Network, 2013

126 citations recorded by the source corpus.

How does tax complexity affect people’s reaction to tax changes? To answer this question, we conduct an experiment in which subjects work for a piece rate and face taxes. One treatment features a simple, the other a complex tax system. The payoff-maximizing effort level and the incentives around this optimum are, however, identical across treatments. We introduce the same sequence of additional taxes in both treatments. Subjects in the complex treatment underreact to new taxes; some ignore new taxes entirely. Contrary to predictions from models of rational inattention, subjects are equally likely to ignore large or small incentive changes.

Subfields: Economics and Econometrics, General Decision Sciences

View Paper: https://www.semanticscholar.org/paper/e11ef02ceb50823e41835ba382cd962169a352f6

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Citations in the corpus

Attention Variation and Welfare: Theory and Evidence from a Tax Salience Experiment (2016, background): “…see, e.g. Chetty et al. (2013), Chetty and Saez (2013), Bhargava and Manoli (2015) on misunderstanding of the earned income tax credit; Abeler and Jäger (2015) for lab experimental evidence about the impacts of complexity; de Bartolome (1995), Liebman and Zeckhauser (2004), Feldman et al. (2016)…”
Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing (2014, unknown): “The discussion about the information cost raises an important question for future research: Does information provision help consumers respond to their true marginal price? Chetty and Saez (2013) find that information provision of nonlinear income tax schedules indeed changes labor supply responses i”
How to Improve Tax Compliance? Evidence from Population-Wide Experiments in Belgium (2019, background): “, Chetty and Saez 2013; Abeler and Jäger 2015; Aghion et al. 2017), our paper does shed new light on how simplifying communication can help to overcome information frictions and/or hassle costs associated with the process of filing and paying taxes (see, e.g., Slemrod, Blumenthal, and Christian 2001”