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

• In Event: JATA Conference - Part I

Abstract

This study investigates the role of choice complexity on the utilization of tax incentives. The current U.S. federal income tax system is rife with complexity (National Taxpayer Advocate, 2012). However, there is little empirical evidence on how this complexity impacts the effectiveness of tax incentives or more specifically whether having multiple incentives targeting the same behavior influences taxpayers’ decisions. We extend choice complexity literature from psychology (e.g., Greifeneder et al. 2010) by investigating whether increasing the number of incentive options affects the likelihood that an individual will (1) engage in the incentivized behavior, (2) and if so, take advantage of the incentive and (3) make the optimal choice of incentives. Based on results from two experiments with 134 participants, we find that having a higher number of incentive choices (high choice complexity) does not increase the likelihood that participants will engage in the incentivized behavior or take advantage of the incentives offered. Instead, a higher 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.

Authors

• Donna Bobek Schmitt, University of Central Florida

• Jason C J Chen, University of San Diego

• Amy M Hageman, Kansas State University

• Yu Tian, University of Central Florida