IDEAS home Printed from https://ideas.repec.org/p/hhs/gunwpe/0729.html
   My bibliography  Save this paper

Multiple Misbehaving:Loss Averse and Inattentive to Monetary Incentives

Author

Listed:
  • Engström, Per

    () (Department of Economics and UCFS, Uppsala University, Sweden)

  • Nordblom, Katarina

    () (Department of Economics, School of Business, Economics and Law, Göteborg University)

  • Stefansson, Arnaldur

    () (Department of Economics, UCFS and UCLS, Uppsala University, Sweden)

Abstract

We study what determines taxpayers’ deduction behavior when filing tax returns. Pre-liminary deficits might be viewed as losses assuming zero preliminary balance as reference point. Swedish taxpayers may escape these losses by claiming deductions after receiving information about the preliminary balance. Furthermore, the Swedish income tax system has a substantial kink (20 percentage points) where the central government tax applies. Taxpayers slightly above the governmental tax kink have substantially higher (standard economic) incentives to claim deductions than taxpayers slightly below the kink. Using a regression kink and discontinuity approach with individual fixed effects, we study a panel of 4.1 million Swedish taxpayers in 1999 to 2006. We find strong causal effects of preliminary deficits on the probability of claiming deductions. The initial em-pirical evidence for a kink in deduction probability at the central government threshold, anticipated by standard economic theory, is weaker but significant. However, a more detailed analysis reveals that the kink at the tax threshold is not likely due to the tax incentives per se. When controlling for the preliminary tax deficit, the kink at the tax threshold disappears. Taxpayers just above the tax kink are namely more likely to run a preliminary tax deficit than those just below it. Hence, the most plausible explanation also for the kink at the tax threshold is therefore loss aversion and not standard economic incentives. The Swedish taxpayers are thus “misbehaving”, in a Thaler (2015) sense, on two separate margins: they are highly loss averse but surprisingly inattentive to standard monetary incentives.

Suggested Citation

  • Engström, Per & Nordblom, Katarina & Stefansson, Arnaldur, 2018. "Multiple Misbehaving:Loss Averse and Inattentive to Monetary Incentives," Working Papers in Economics 729, University of Gothenburg, Department of Economics.
  • Handle: RePEc:hhs:gunwpe:0729
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/2077/56202
    File Function: Full text
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Philipp Doerrenberg & Andreas Peichl & Sebastian Siegloch, 2017. "The Elasticity of Taxable Income in the Presence of Deduction Possibilities," NBER Chapters, in: Personal Income Taxation and Household Behavior (TAPES), National Bureau of Economic Research, Inc.
    2. Du Rietz, Gunnar & Johansson, Dan & Stenkula, Mikael, 2013. "Swedish Labor Income Taxation (1862–2013)," Working Paper Series 977, Research Institute of Industrial Economics, revised 10 Sep 2015.
    3. 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.
    4. Tuomas Matikka, 2018. "Elasticity of Taxable Income: Evidence from Changes in Municipal Income Tax Rates in Finland," Scandinavian Journal of Economics, Wiley Blackwell, vol. 120(3), pages 943-973, July.
    5. Michele Bernasconi & Alberto Zanardi, 2004. "Tax Evasion, Tax Rates, and Reference Dependence," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(3), pages 422-445, September.
    6. Per Engström & Katarina Nordblom & Henry Ohlsson & Annika Persson, 2015. "Tax Compliance and Loss Aversion," American Economic Journal: Economic Policy, American Economic Association, vol. 7(4), pages 132-164, November.
    7. Bastani, Spencer & Selin, Håkan, 2014. "Bunching and non-bunching at kink points of the Swedish tax schedule," Journal of Public Economics, Elsevier, vol. 109(C), pages 36-49.
    8. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
    9. David Card & David S. Lee & Zhuan Pei, 2009. "Quasi-Experimental Identification and Estimation in the Regression Kink Design," Working Papers 1206, Princeton University, Department of Economics, Industrial Relations Section..
    10. Alex Rees-Jones, 2018. "Quantifying Loss-Averse Tax Manipulation," Review of Economic Studies, Oxford University Press, vol. 85(2), pages 1251-1278.
    11. Levy, Haim & Levy, Moshe, 2009. "The safety first expected utility model: Experimental evidence and economic implications," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1494-1506, August.
    12. 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, vol. 101(1), pages 129-157, February.
    13. David Card & David S. Lee & Zhuan Pei, 2009. "Quasi-Experimental Identification and Estimation in the Regression Kink Design," Working Papers 1206, Princeton University, Department of Economics, Industrial Relations Section..
    14. John A. List, 2003. "Does Market Experience Eliminate Market Anomalies?," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 41-71.
    15. Dhami, Sanjit & al-Nowaihi, Ali, 2007. "Why do people pay taxes? Prospect theory versus expected utility theory," Journal of Economic Behavior & Organization, Elsevier, vol. 64(1), pages 171-192, September.
    16. Claus Thustrup Kreiner & S?ren Leth-Petersen & Peer Ebbesen Skov, 2014. "Year-End Tax Planning of Top Management: Evidence from High-Frequency Payroll Data," American Economic Review, American Economic Association, vol. 104(5), pages 154-158, May.
    17. Enrico Diecidue & Jeroen van de Ven, 2008. "Aspiration Level, Probability Of Success And Failure, And Expected Utility," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(2), pages 683-700, May.
    18. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    19. 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.
    20. Youssef Benzarti, 2017. "How Taxing Is Tax Filing? Using Revealed Preferences to Estimate Compliance Costs," NBER Working Papers 23903, National Bureau of Economic Research, Inc.
    21. Yaniv, Gideon, 1999. "Tax Compliance and Advance Tax Payments: A Prospect Theory Analysis," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(4), pages 753-764, December.
    22. Paetzold, Jörg, 2017. "How do wage earners respond to a large kink? Evidence on earnings and deduction behavior from Austria," Working Papers in Economics 2017-1, University of Salzburg, revised 19 Dec 2017.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bastani, Spencer & Giebe, Thomas & Miao, Chizheng, 2020. "Ethnicity and tax filing behavior," Journal of Urban Economics, Elsevier, vol. 116(C).

    More about this item

    Keywords

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

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhs:gunwpe:0729. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ann-Christin Räätäri Nyström). General contact details of provider: http://edirc.repec.org/data/naiguse.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.