Complex Tax Incentives

Johannes Abeler, Simon Jäger
2015 American Economic Journal: Economic Policy  
How does complexity affect people's reaction to tax changes? To answer this question, we conduct an experiment in which subjects work for a piece rate and face taxes. One treatment features a simple tax system, the other a complex one. Subjects' economic incentives are identical across treatments. We introduce the same sequence of additional taxes in both treatments. Subjects in the complex treatment underreact to new taxes; some ignore new taxes entirely. The underreaction is stronger for
more » ... s stronger for subjects with lower cognitive ability. Contrary to predictions from models of rational inattention, subjects are equally likely to ignore large or small incentive changes. (JEL D14, H24, H31)
doi:10.1257/pol.20130137 fatcat:bdlyvub33vf5dgg4xvwdjhbpim