Tax Loss Offset Restrictions and Biased Perception of Risky Investments

Mehrmann, Annika and Sureth-Sloane, Caren (2017) Tax Loss Offset Restrictions and Biased Perception of Risky Investments. WU International Taxation Research Paper Series, 2017-11. WU Vienna University of Economics and Business, Universität Wien, Vienna.


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We investigate how tax loss offset restrictions affect an investor's evaluation of risky investments under bounded rationality. We analytically identify behavioral tax effects for different levels of loss offset restrictions, tax rate and prospect theoretical biases (loss aversion, probability weighting and reference dependence) and find tax loss offset restrictions significantly bias investor perception, even more heavily than the tax rate. If loss offset restrictions are rather generous, investors are very loss averse or assign a huge weight to loss probabilities, taxation is likely to increase the preference value of risky investments (behavioral tax paradox). Surprisingly, the identified significant perception biases of tax loss offset restrictions occur under both high and low tax rates and thus are relatively insensitive to tax rate changes. Finally, we identify huge differences in behavioral tax effects across countries indicating that tax loss offset restrictions crucially determine the perceived tax quality of a country for risky investments. Our analysis is relevant for policy makers discussing future tax reforms as well as for investors assessing risky investment opportunities.

Item Type: Paper
Additional Information: Editors: Eva Eberhartinger, Michael Lang, Rupert Sausgruber and Martin Zagler (Vienna University of Economics and Business), and Erich Kirchler (University of Vienna)
Keywords: asymmetric taxation, investment decisions, loss offset restrictions, perception bias, risktaking, tax effects, tax losses, prospect theory, behavioral taxation
Classification Codes: JEL D81, D91, H21, H25
Depositing User: ePub Administrator
Date Deposited: 06 Oct 2017 07:58
Last Modified: 22 Oct 2019 00:41


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