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Loss aversion and indifference to tax rates: Evidence from tax filing data

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  • Engström, Per
  • Nordblom, Katarina
  • Stefánsson, Arnaldur

Abstract

A fundamental tenet of economics is that agents respond to incentives. When filing their tax returns, Swedish taxpayers get information about whether they are below or above a salient tax kink, information that could affect tax-filing behavior. Ceteris paribus, rational taxpayers would be more likely to claim deductions when facing a higher marginal tax rate. They also get informed whether they can expect a tax refund or have taxes due. This information would be of no importance to rational individuals, but a loss averse taxpayer would be more likely to claim deductions if having taxes due than if expecting a refund. We study the probability of claiming deductions in an RDK framework using register data on the universe of Swedish taxpayers over an eight-year period. We find a strong causal effect of taxes due, while the response to the marginal tax kink is insignificant. The results are similar for inexperienced (young) and experienced (old) taxpayers. Hence, loss aversion is much more decisive than standard economic incentives in predicting deduction behavior.

Suggested Citation

  • Engström, Per & Nordblom, Katarina & Stefánsson, Arnaldur, 2022. "Loss aversion and indifference to tax rates: Evidence from tax filing data," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 287-311.
    • Handle: RePEc:eee:jeborg:v:200:y:2022:i:c:p:287-311
    DOI: 10.1016/j.jebo.2022.05.006
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    More about this item

    Keywords

    Tax compliance; Loss aversion; Prospect theory; Quasi-experiment; Regression kink; Regression discontinuity;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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