Tax Rate Biases in Tax Planning Decisions: Experimental Evidence

Abstract

Contrary to standard economic theory, recent empirical findings suggest that firms do not always engage in economically optimal tax planning. We conduct a laboratory experiment and find robust evidence that decision biases offer a behavioral explanation for suboptimal tax planning. When facing time pressure in an intra-group cross-border financing decision, subjects apply heuristics based on the salience of statutory tax rates. This stirs decision makers to underestimate the effects of tax-base changes and causes economically suboptimal decisions. We find that tax-planning behavior is largely unaffected by subjects' work experience or education in accounting, taxation, and/or finance. However, we observe an overconfidence bias in subjects with work experience. In line with the theory of rational inattention, an increasing tax-burden difference between two tax-planning strategies weakly mitigates the use of heuristics. Taken together, our findings suggest that tax-information salience drives tax-planning decisions. This effect might cause decision biases and contribute to the undersheltering puzzle.