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Loss evasion and tax aversion

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Author Info

  • Engström, Per

    ()
    (Uppsala Center for Fiscal Studies)

  • Nordblom, Katarina

    ()
    (Uppsala Center for Fiscal Studies)

  • Ohlsson, Henry

    ()
    (Uppsala Center for Fiscal Studies)

  • Persson, Annika

    (The Swedish Tax Agency)

Abstract

The objective of this paper is to study if taxpayers behave in a loss averse manner when filing their tax returns. This is important for tax design but also for understanding human behavior in general. The predictions of prospect theory can be contrasted to those of expected utility theory. We use data for 3.6 million Swedish taxpayers for the income year 2006. Our research method is quasi-experimental using a regression kink and discontinuity approach. We also use an alternative instrumental-variables approach. There is strong evidence of loss aversion. We estimate the coefficient of loss aversion using actual behavior and the instrument-variables approach. Our estimate is very close to the estimates reported in the experimental literature.

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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series, Center for Fiscal Studies with number 2011:11.

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Length: 43 pages
Date of creation: 29 Nov 2011
Date of revision:
Handle: RePEc:hhs:uufswp:2011_011

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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Related research

Keywords: loss aversion; prospect theory; tax compliance; quasi-experiment; regression kink; regression discontinuity;

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References

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  1. Kobberling, Veronika & Wakker, Peter P., 2005. "An index of loss aversion," Journal of Economic Theory, Elsevier, Elsevier, vol. 122(1), pages 119-131, May.
  2. David Genesove & Christopher Mayer, . "Loss Aversion and Seller Behavior: Evidence from the Housing Market," Zell/Lurie Center Working Papers, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania 323, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  3. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, Econometric Society, vol. 47(2), pages 263-91, March.
  4. Mohammed Abdellaoui & Han Bleichrodt & Corina Paraschiv, 2007. "Loss Aversion Under Prospect Theory: A Parameter-Free Measurement," Management Science, INFORMS, INFORMS, vol. 53(10), pages 1659-1674, October.
  5. Botond Koszegi & Matthew Rabin, 2005. "A Model of Reference-Dependent Preferences," Levine's Bibliography 784828000000000341, UCLA Department of Economics.
  6. David S. Lee & Thomas Lemieux, 2010. "Regression Discontinuity Designs in Economics," Journal of Economic Literature, American Economic Association, vol. 48(2), pages 281-355, June.
  7. Simon Gaechter & Eric Johnson & Andreas Herrmann, 2007. "Individual-Level Loss Aversion In Riskless And Risky Choices," Discussion Papers, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham 2007-02, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  8. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(6), pages 1325-48, December.
  9. Dhami, Sanjit & al-Nowaihi, Ali, 2007. "Why do people pay taxes? Prospect theory versus expected utility theory," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 64(1), pages 171-192, September.
  10. Thaler, Richard H, et al, 1997. "The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(2), pages 647-61, May.
  11. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, Springer, vol. 5(4), pages 297-323, October.
  12. Michele Bernasconi & Alberto Zanardi, 2004. "Tax Evasion, Tax Rates, and Reference Dependence," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 60(3), pages 422-, September.
  13. Yaniv, Gideon, 1999. "Tax Compliance and Advance Tax Payments: A Prospect Theory Analysis," National Tax Journal, National Tax Association, vol. 52(n. 4), pages 753-64, December.
  14. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(4), pages 1039-61, November.
  15. Ulrich Schmidt & Horst Zank, 2005. "What is Loss Aversion?," Journal of Risk and Uncertainty, Springer, Springer, vol. 30(2), pages 157-167, January.
  16. Slemrod, Joel, et al, 1997. "April 15 Syndrome," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 35(4), pages 695-709, October.
  17. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, American Finance Association, vol. 53(5), pages 1775-1798, October.
  18. Bateman, Ian J, et al, 1997. "A Test of the Theory of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(2), pages 479-505, May.
  19. Mohammed Abdellaoui & Han Bleichrodt & Olivier L’Haridon, 2008. "A tractable method to measure utility and loss aversion under prospect theory," Journal of Risk and Uncertainty, Springer, Springer, vol. 36(3), pages 245-266, June.
  20. Kirchler, Erich & Maciejovsky, Boris, 2001. "Tax compliance within the context of gain and loss situations, expected and current asset position, and profession," Journal of Economic Psychology, Elsevier, Elsevier, vol. 22(2), pages 173-194, April.
  21. Robben, Henry S. J. & Webley, Paul & Elffers, Henk & Hessing, Dick J., 1990. "Decision frames, opportunity and tax evasion : An experimental approach," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 14(3), pages 353-361, December.
  22. Schmidt, Ulrich & Traub, Stefan, 2002. " An Experimental Test of Loss Aversion," Journal of Risk and Uncertainty, Springer, Springer, vol. 25(3), pages 233-49, November.
  23. Devin G. Pope & Maurice E. Schweitzer, 2011. "Is Tiger Woods Loss Averse? Persistent Bias in the Face of Experience, Competition, and High Stakes," American Economic Review, American Economic Association, American Economic Association, vol. 101(1), pages 129-57, February.
  24. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(1), pages 73-92, February.
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Citations

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Cited by:
  1. Bastani, Spencer & Selin, Håkan, 2011. "Bunching and Non-Bunching at Kink Points of the Swedish Tax schedule," Working Paper Series, Center for Fiscal Studies, Uppsala University, Department of Economics 2011:12, Uppsala University, Department of Economics.
  2. Jantti, Markus & Kanbur, Ravi & Nyyssola, Milla & Pirttila, Jukka, 2013. "Poverty and Welfare Measurement on the Basis of Prospect Theory," Working Papers, Cornell University, Department of Applied Economics and Management 180093, Cornell University, Department of Applied Economics and Management.
  3. Ganong, Peter & Jäger, Simon, 2014. "A Permutation Test and Estimation Alternatives for the Regression Kink Design," IZA Discussion Papers 8282, Institute for the Study of Labor (IZA).

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