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The importance of taxes in entrepreneurial decisions: an analysis of practicing physicians’ behavior

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Abstract

An irrational strong importance of taxes in an individual’s decision-making behavior is one of the most popular assumptions about the behavioral effects of taxation. However, empirical research about this phenomenon is rare. In a study of German physicians, this paper analyzes whether tax aspects are over weighted in entrepreneurial decision-making. Furthermore, factors that may influence the irrational decision-making behavior of actors are analyzed. As research method, a conjoint analysis is used that permits measurement of the relative importance of tax aspects in decisions. The first result of the study is that the majority of the respondents (practicing physicians) misestimate their own marginal tax rate. The main result of the study is that––in comparison to the neoclassical model of rational maximization of consumption utility––most of the respondents overweight tax aspects. No evidence can be found for any relationship between indicators of a possible tax aversion (e.g., low satisfaction with the tax system) and attention to tax aspects in the decisions analyzed.

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Notes

  1. For an overview see also Sigloch (1993), for a specific overview of tax accountants’ judgment/decision making see Roberts (1998).

  2. As an exception, the contrary is possible: if e.g. an investment is tax privileged for a low tax rate while being as good as the alternative for a higher tax rate, then an overestimation of the tax rate can lead to an irrational underweighting of the tax influence in the decision calculus.

  3. The dimension in which the questions are presented (percent or Euro) may affect the results, cf. McCaffery and Baron (2003). This is why we chose percent for the first and Euro for the second decision problem.

  4. This is the case e.g. for the choice between investments in physical assets and financial investments. Nonetheless, the misperception of the relevant personal tax rate will distort the choice between saving and consumption even in a consumption-based individual tax system, because this misperception will lead to a misperception of the endowment and so cause a “pseudo income effect”.

  5. Dietrich et al. (2008) use the term “perceived tax rate” for the subjective estimation of the tax rate.

  6. However, it is possible that respondents answered the question with the objective of making their behaviour appear irrational.

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Acknowledgments

We thank Mario Rese (Ruhr-Universität Bochum) for the suggestion that we apply the conjoint analysis to the measurement of behavioral tax effects and for valuable comments. For helpful remarks we thank Maik Dietrich, Henriette Houben, Silke Hüsing and two anonymous referees as well as the participants of the 32nd meeting of the accounting commission in the Verein für Socialpolitik (April 2007 in Vienna).

Author information

Authors and Affiliations

  1. Institute of Auditing and Business Taxation, Freie Universität Berlin, Garystraße 21, 14195, Berlin, Germany

    Jochen Hundsdoerfer

  2. Department of International Marketing, University of Vienna, Bruenner Straße 72, 1210, Vienna, Austria

    Christina Sichtmann

Authors
  1. Jochen Hundsdoerfer
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  2. Christina Sichtmann
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Corresponding author

Correspondence to Jochen Hundsdoerfer.

Appendices

Appendix 1

Questionnaire

2.1 Conjoint analysis

2.1.1 Survey object 1: financial investment with differing returns

Assuming that your bank offers you the following investment opportunity: You pay an amount of 30.000 Euro today. A year from today, your bank will pay back the money including interest. You have to pay different taxes with regard to the interest income. The interest income can be

  • tax free

  • partially (half) taxable

  • fully taxable

Please rank the following investments as such that the investment you prefer most is ranked first and the investment you prefer least is ranked last.

Investment no.

Rate of return before taxes (%)

Taxable part of the rate of return (%)

1

4

0.0

2

2

0.0

3

4

100.00

4

3

100.00

5

2

50.00

6

4

50.00

7

3

50.00

8

2

100.00

9

3

0.0

2.1.2 Survey object 2: acquisition of products/services

Certain expenses are not tax deductible, e.g., fines for violating road traffic regulations on business trips. Other expenses are only partly tax deductible, for example entertainment expenses. You have acquired a product that has to be paid now. The payment differs with regard to

  • the amount of expenses which can be 40, 60 or 70 Euro.

  • its tax deductibility which can be not tax deductible (as fines), 70% tax deductible (as entertainment expenses) or 100% tax deductible.

Please rank the following investments as such that the variant with the least burden is ranked first and the variant with the most burden is ranked last.

Variant

Amount of the expense

Tax deductability

1

60

Not tax deductible

2

40

Not tax deductible

3

60

100% tax deductible

4

50

100% tax deductible

5

40

70% tax deductible

6

60

70% tax deductible

7

50

70% tax deductible

8

40

100% tax deductible

9

50

Not tax deductible

2.2 Tax rate

Your taxable income increases by 100 Euro. Please estimate your additional amount of tax (income tax, solidarity surcharge) in Euro. Please indicate an estimate even in the case that you are not 100% sure.

Note: We deliberately do not ask you for your income. By the way: we cannot calculate your income from your estimation without further information (e.g., marital status). — Euro

2.3 Tax aversion

All things considered, how does the politics come up to your expectations with regard to the following public duties and responsibilities? (scale: 1 = does not come up to my expectations at all; 7 = fully comes up to my expectations)

  • Public spending policies

  • Public health care policies

  • Tax policies

  • Tax accounting rules for physicians.

2.4 Tax savings motives

To save taxes I invest even if it is not necessary for my doctor’s practice in a business sense. (scale: 1 = fully disagree; 5 = fully agree).

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Hundsdoerfer, J., Sichtmann, C. The importance of taxes in entrepreneurial decisions: an analysis of practicing physicians’ behavior. Rev Manag Sci 3, 19–40 (2009). https://doi.org/10.1007/s11846-008-0023-0

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