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Quantifying Loss-Averse Tax Manipulation

Alex Rees-Jones

Review of Economic Studies, 2018, vol. 85, issue 2, 1251-1278

Abstract: This article presents evidence that loss aversion affects taxpayers as they file their annual tax returns, and presents a framework for estimating the policy impact of this psychological phenomenon. In my theoretical framework, taxpayers manipulate the money paid to the tax authority through avoidance and evasion activities. When taxpayers face the prospect of owing the tax authority money on tax day, loss aversion generates the perception of a greater marginal utility of tax reduction and therefore motivates greater pursuit of tax reduction activities. Applying a bunching-based identification strategy to U.S. tax return data, I estimate that taxpayers facing a payment on tax day reduce their tax liability by $34 more than taxpayers owed a refund.

Keywords: Loss aversion; Income taxation; Tax sheltering; Tax avoidance; Tax evasion (search for similar items in EconPapers)
JEL-codes: D03 H24 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:85:y:2018:i:2:p:1251-1278.

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