1995 JATA Conference Experimental Methods as Applied to Problems in Taxation

Volume 17, Supplement

Income Tax Subsidies and Research and
Development Spending in a Competitive
Economy: An Experimental Study

Jon S. Davis, Herman C. Quirmbach, and Charles W. Swenson


The present study extends earlier work which has studied the impact of tax subsidies on R&D spending (e.g. Berger 1993); Tillinger 1991) by introducing theoretical predictions of the effects of tax subsidies in a competitive game-theoretic environment by testing these predictions using experimental economic methods. Two types of subsidies are examined: a uniform subsidy and a subsidy given to only half of the participants (reflecting local and international environments, respectively). These effects are evaluated in both a stylized setting with full information, and in a more realistic setting where players have incomplete information on other players' tax status and levels of R&D investments. In addition, both full appropriability (where the innovators capture all rents from the discovery) and partial appropriability (where non-innovators capture a portion of the rents) are examined. Despite the size of the subsidy, our equilibrium predictions were that R&D spending would increase by a much smaller percent than the percent decrease in R&D cost (due to the subsidy). This effect was found in all of the experiments. Further, experimental results generally supported our theoretical prediction that an uneven tax subsidy across investors would result in a decline in R&D investments vis-a-vis a setting where an equal tax subsidy was provided to all. Finally, contrary to predictions, we found that the subsidy resulted in a larger increase in R&D in settings of partial appropriability than in settings of full appropriability.

An Empirical Investigation of Taxpayer
Awareness of Marginal Tax Rates

Timothy J. Rupert and Carol M. Fischer


Much of the literature that examines the effect of tax incentives on decisions implicitly assumes that taxpayers have accurate knowledge of their marginal tax rate. Several studies have addressed taxpayer awareness of their rates and have found this awareness lacking. However, the conclusions drawn from these previous studies about the taxpayer's actual rate are all constrained by data limitations. The present study overcomes these previous limitations by employing a two-part survey method that elicits both perceptions and tax return information. One hundred and eight respondents completed this two-part survey. Results of the survey suggest that taxpayers' perceived marginal tax rates differ significantly from their actual rates. Further, this result holds even when a more liberal definition of accuracy is employed. An examination of the effect of several variables on the degree of misperception suggest that those taxpayers who have higher income, who do not receive preparation assistance, and who use professional consultants for investment advice are more accurate in estimating their rate. Implications of these finding for experimental research are discussed.

The Influence of Contextual Factors on
IRS Agents' Assessments of Taxpayer Negligence

Michael L. Roberts


This paper investigates the subjective judgments of IRS Revenue Agents about assessment of taxpayer negligence. Interviews with a designated IRS expert led to the development of a theory of taxpayer culpability based on circumstantial evidence. A series of 16 cases was developed involving variations of four factors that Culpability Theory and the IRS expert suggest might effect Revenue Agents' decisions to assess a negligence penalty. The four factors were: the educational level of the taxpayer, the size of the audit adjustment, the number of years involved, and whether or not the taxpayer was represented by a CPA. One hundred Revenue Agents participated in the experiment. The results demonstrate the influence of three of the four hypothesized factors, and support the hypothesized interaction effect as well. In general, the size of the audit adjustment had the largest single impact on the decision to assess a negligence penalty and representation by a CPA had the least impact.

Prior Knowledge, Information Search
Behaviors, and Performance in Tax
Research Tasks

C. Bryan Cloyd


This study examines the effects of prior knowledge on the information search and evaluation behaviors of tax professionals performing a complex tax research task. Despite the importance of tax research tasks to practice, very few studies have investigated the determinants of performance in this task. The results of this study indicate that prior knowledge of relevant tax rules affects (1) the information search strategies tax professionals use, (2) the amount of relevant information located, the attention (in terms of time) paid to relevant information, and the speed with which this information is retrieved, and (3) the ability to discriminate between relevant and non-relevant information. Further, after controlling for the effects of prior knowledge, the results suggest that particular search strategies are related to overall research effectiveness.