ABSTRACT This study examines the effect of timing (gradual versus immediate) and direction (tax increase or decrease) of a tax change on taxpayer behavior. Specifically, we focus on capital gain tax changes and preferences for investment in riskier assets. We run an experiment with 117 participants who allocate investment dollars between two funds of differing risk. Drawing on mental accounting and hedonic editing (Thaler 1985; Thaler and Johnson 1990), we posit that a tax decrease (a “gain”) implemented gradually over several years will result in a greater increase in risky investment once the decrease is fully implemented than when the tax change is implemented all at once. In contrast, once a tax increase (a “loss”) is fully implemented, a smaller decrease in risky investment will result when the change occurs all at once rather than gradually. Our findings support these expectations, suggesting that the manner of implementing a tax law change may impact decisions. Data Availability: Contact the authors.

ABSTRACT In an online experiment, the immediate (Roth) versus deferred taxation of retirement income affects taxpayers' investment decisions such that tax-deferred plan investors under-adjust for future tax burdens and overestimate their future wealth compared to Roth investors. When presented with a specific after-tax monetary goal, Roth account holders invest more in higher-risk, higher-return assets than tax-deferred account holders. We investigate four aspects of this investment context that could alleviate these differences: (1) implementing a “do-your-best” goal, (2) reframing specific goals in pre-tax dollars, (3) explicitly prompting investors to estimate future tax burdens, and (4) providing performance feedback. These interventions reduce differences between Roth and tax-deferred investor behaviors, but do not entirely close the gap on their own. In combination, reframing goals and prompting future tax estimations encourage tax-deferred account holders to invest in risky assets to the same degree as Roth investors only when paired with performance feedback.