Tax-Rate Biases in Tax Decisions: Experimental Evidence

Abstract

ABSTRACTThis study investigates biases in tax decisions. In a series of four laboratory experiments with 303 students and 62 tax professionals, we document a systematic tax-rate bias in decisions under time constraints. Specifically, decision makers overestimate the relevance of less complex tax-rate information compared to more complex tax-base information. This behavior leads to suboptimal tax decisions. We also find that decision making, on average, is unaffected by professional experience: Students and tax professionals are similarly prone to tax-rate bias. However, senior tax professionals are more rationally inattentive. These decision makers are less likely to exhibit a tax-rate bias when exhibiting such bias is relatively costly. Overall, our findings suggest that resource constraints impede the use of complex tax-base information, which results in suboptimal tax decisions. Interviews with senior tax professionals indicate potential for tax-rate biases in real-world tax decisions and thereby provide directions for future research.JEL Classifications: C91; D03; H32; K34; M21; M41.