How Does the Deferral of a Distortive Tax Affect Overproduction and Asset Allocation?

Research output: Contribution to journalArticleResearchpeer review

Authors

  • Kay Blaufus
  • Nadja Fochmann
  • Jochen Hundsdoerfer
  • Michael Milde

External Research Organisations

  • Freie Universität Berlin (FU Berlin)
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Details

Original languageEnglish
Pages (from-to)1157-1184
Number of pages28
JournalEuropean accounting review
Volume32
Issue number5
Early online date16 Jan 2022
Publication statusPublished - 2023

Abstract

Deferred income taxation is widely used to encourage investment or saving. However, most income tax bases are more or less distortive (non-neutral). Using lab experiments, we find that the deferral of a distortive income taxation can result in substantial overproduction and less willingness to take risks. Subjects underweight the deferred tax burden and neglect the tax distortion because they act myopically and tend to make choices in isolation rather than simultaneously (choice bracketing). Despite opportunities to learn, the overproduction remains substantial. Additional analyses confirm that the observed misperception of deferred taxes is not caused by low tax salience or low effort, as providing additional accounting information on deferred taxes and introducing accountability reports do not change overproduction behavior. Only if we change the timing of the taxation from deferred to an economically equivalent immediate distortive tax system do overproduction and the effect on asset allocation almost disappear.

Keywords

    Choice bracketing, Deferred taxation, Distortive taxation, Immediate taxation, Overproduction, Tax misperception

ASJC Scopus subject areas

Cite this

How Does the Deferral of a Distortive Tax Affect Overproduction and Asset Allocation? / Blaufus, Kay; Fochmann, Nadja; Hundsdoerfer, Jochen et al.
In: European accounting review, Vol. 32, No. 5, 2023, p. 1157-1184.

Research output: Contribution to journalArticleResearchpeer review

Blaufus K, Fochmann N, Hundsdoerfer J, Milde M. How Does the Deferral of a Distortive Tax Affect Overproduction and Asset Allocation? European accounting review. 2023;32(5):1157-1184. Epub 2022 Jan 16. doi: 10.1080/09638180.2021.2018341
Blaufus, Kay ; Fochmann, Nadja ; Hundsdoerfer, Jochen et al. / How Does the Deferral of a Distortive Tax Affect Overproduction and Asset Allocation?. In: European accounting review. 2023 ; Vol. 32, No. 5. pp. 1157-1184.
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title = "How Does the Deferral of a Distortive Tax Affect Overproduction and Asset Allocation?",
abstract = "Deferred income taxation is widely used to encourage investment or saving. However, most income tax bases are more or less distortive (non-neutral). Using lab experiments, we find that the deferral of a distortive income taxation can result in substantial overproduction and less willingness to take risks. Subjects underweight the deferred tax burden and neglect the tax distortion because they act myopically and tend to make choices in isolation rather than simultaneously (choice bracketing). Despite opportunities to learn, the overproduction remains substantial. Additional analyses confirm that the observed misperception of deferred taxes is not caused by low tax salience or low effort, as providing additional accounting information on deferred taxes and introducing accountability reports do not change overproduction behavior. Only if we change the timing of the taxation from deferred to an economically equivalent immediate distortive tax system do overproduction and the effect on asset allocation almost disappear.",
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