Are More Choices Better? An Experimental Investigation of the Effectiveness of Multiple Tax Incentives

• In Event: Incentives and Multitask Environments

Abstract

The purpose of this study is to investigate whether choice complexity affects the utilization of tax incentives. Given that complexity in the tax code is an ongoing problem, including the existence of multiple tax incentives to encourage the same behavior (National Taxpayer Advocate 2012; AICPA 2014), understanding how the number of choices affects tax policy outcomes is particularly important in shaping effective policy. We extend choice complexity literature from psychology (e.g., Greifeneder et al. 2010) by investigating whether the number of incentive options affects the likelihood that an individual will (1) engage in the incentivized behavior, (2) if so, take advantage of the incentive and, (3) make the optimal choice of incentives. Based on results from three experiments with 212 participants, we find that having a greater number of incentive choices does not increase individuals’ likelihood of engaging in the incentivized behavior or selecting an incentive. Instead, a greater number of incentive choices increases the chance of failing to choose the optimal incentive and increases the likelihood of making an error in determining the monetary benefit of the incentive that is chosen. We conclude that having many incentive choices does not improve the likelihood of achieving the policy objective - and instead may have negative consequences on taxpayer decisions and policy outcomes. Our study contributes to the choice complexity literature by examining the effects of choice complexity on making an optimal choice, and provides further evidence for tax policymakers on the need to reduce choice complexity within the tax law.

Authors

• Donna Bobek Schmitt, University of South Carolina

• Jason C J Chen, University of San Diego

• Amy M Hageman, Kansas State University

• Yu Tian, University of Central Florida