The Biased Effect of Aggregated and Disaggregated Income Taxation on Investment Decisions

Abstract

In a laboratory experiment that allows us to vary the taxation method while keeping the financial outcomes constant, we find clear evidence that aggregated income taxation (comparable to profit taxation) with complete loss deduction induces a sustained bias towards more risky investment decisions, while disaggregated income taxation (comparable to a transaction taxation with loss offset) does not. We suggest that this bias may be exploited to increase the volume of private investments by choosing aggregated income taxation if investors are (too) riskaverse, and to decrease the volume and the risk by choosing disaggregated income taxation if investors are (too) risk-seeking.

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