Biases in Tax Decisions

We conduct a series of four laboratory experiments and interviews with senior tax professionals to study biases in tax decisions. In our experiments with 303 students and 62 experienced tax professionals, we find a systematic tax-rate bias in decisions under time constraints. Specifically, decision-makers overestimate the relevance of less complex tax-rate information compared to more complex tax-base information. This behavior leads to suboptimal decision-making. Moreover, we find that decision-making is unaffected by professional experience: students and tax professionals are similarly prone to tax-rate bias. Yet, tax professionals in senior positions are more rationally inattentive. These decision-makers are less likely to exhibit a tax-rate bias when exhibiting such bias is relatively costly. In-depth interviews with senior tax professionals corroborate the external validity of these results. Overall, our findings suggest that resource constraints impede the use of complex information, which results in suboptimal tax decisions.