The mutual impact of deferral labour taxation and capital income taxation on risk-taking behaviour: an experimental analysis

Abstract

Does the timing of labour earnings taxation encroaches upon capital income taxation and individual risk-taking investment decisions, i.e. portfolio selection? This paper presents the results of a laboratory experiment that is, contrary to previous approaches, not restricted to the analysis of capital income taxation (fully taxable vs. tax-exempt investment earnings) and individual risktaking, but adds other dimensions of taxation, i.e. deferral or immediate labour earnings taxation. Empirical findings support the view that tax framing effects affect tax burden visibility, changing individuals´ risk- taking propensity substantially. A tax system applying deferral taxation of labour earnings turns out to be more attractive to taxpayers with regard to risk-taking investment than immediate labour taxation with tax-exempt earnings from investment.