American Economic Association Tax Compliance and Loss Aversion Author(s): Per Engström, Katarina Nordblom, Henry Ohlsson and Annika Persson Source: American Economic Journal: Economic Policy, Vol. 7, No. 4 (November 2015), pp. 132-164 Published by: American Economic Association Stable URL: https://www.jstor.org/stable/24739159 Accessed: 27-10-2019 18:36 UTC JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at https://about.jstor.org/terms American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to American Economic Journal: Economic Policy This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms American Economie Journal: Economie Policy 2015, 7(4): 132-164 http://dx.doi. org/10.1257/pol.20130134 Tax Compliance and Loss Aversion1 By Per Engström, Katarina Nordblom, Henry Ohlsson, and Annika Persson* We study if taxpayers are loss averse when filing returns. Preliminary deficits might be viewed as losses assuming zero preliminary bal ances as reference points. Swedish taxpayers can to try to escape such losses by claiming deductions after receiving information about the preliminary balance. Using a regression kink and discontinu ity approach, we study data for 3.6 million Swedish taxpayers for 2006. There are strong causal effects of preliminary tax deficits on the probability of claiming deductions. Compliance will increase and auditing costs will be reduced if preliminary taxes are calibrated so that most taxpayers receive refunds. [J EL H24, H26j Two same taxpayers, A according and B, are about to filethey their tax from returns. They both have the income and to the information receive the Tax Agency they are both supposed to pay $30,000 in total taxes. However, their employers have already withheld taxes at source during the year; A's employer $29,000 and B's $31,000. Hence, A has a preliminary balance of $ 1,000 due, while B will get a refund of the same amount. According to standard neoclassical theory, both would behave in the same manner since they both end up with the same tax liability of $30,000. We find, however, that they behave significantly different: A is much more likely than B to claim deductions in order to reduce his tax liability. This finding is not consistent with neoclassical theory. On the other hand, reference dependence and loss aver sion—as defined in Prospect Theory by Kahneman and Tversky (1979) and Tversky * Engström: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden and Uppsala Center for Fiscal Studies (UCFS) (e-mail: per.engstrom@nek.uu.se); Nordblom: Department of Economics, University of Gothenburg, P.O. Box 640, SE-405 30 Gothenburg, Sweden, and UCFS (e-mail: katarina.nordblom@economics.gu.se); Ohlsson: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden, and UCFS (e-mail: henry.ohlsson@nek.uu.se); Persson: The Swedish Tax Agency, SE-171 94 Solna, Sweden (e-mail: annika.persson@skatteverket.se). We would like to thank Spencer Bastani, Fredrik Carlsson, Edoardo Di Porto, Martin Dufwenberg, Olof Johansson-Stenman, Martin Kocher, David Lee, Mikael Lindahl, Oskar Nordstrom Skans, Matthias Sutter, Mäns Söderbom, Benno Torgler, Clive Werdt, Magnus Wikström, seminar participants in Aarhus, Deakin; Melbourne, Gothenburg, Växjö, University of New South Wales (UNSW); Sydney, VATT; Helsinki, UCFS, the UCFS Scientific Advisory Board, the European Commission, the Finnish and the Swedish Tax Agencies as well as conference participants at the International Institute of Public Finance (IIPF) 2013 Taormina conference, the Shadow 2011 Münster conference, and the 2011 Swedish Economics Meeting in Uppsala for their valuable comments and suggestions. We are also grateful to three anonymous referees for their helpful comments. Financial support to UCFS from Riksbankens Jubileumsfond (RJ), the Swedish Council for Working Life and Social Research (FAS), and the Swedish Tax Agency is gratefully acknowledged. Nordblom also acknowledges financial support from the Swedish Research Council, project no. 421-2010-1420, and from RJ. Some of the work was done as Ohlsson enjoyed the hospitality of the School of Economics, UNSW, Sydney and the Department of Economics, University of Melbourne during his sabbatical. Financial support for the sabbatical from the Wenner-Gren Foundations is gratefully acknowledged. TGo to http://dx.doi.org/10.1257/pol.20130134 to visit the article page for additional materials and author disclosure statement(s) or to comment in the online discussion forum. 132 This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms VOL. 7 NO. 4 ENGSTROM ETAL.: TAX COMPLIANCE AND LOSS AVERSION 133 0.08 o | ■o 0.06-1 co O) c o ffi o -O 0 02-1 , , , 0.00-1 . , , -3,000 -2,000 -1,000 0 1,000 2,000 3,000 Preliminary deficit, SEK Figure 1. Share Claiming a Deduction as a Function of the Preliminary Deficit and Kahneman (1992)—predict such outcomes. Loss averse individuals value losses (in comparison to a reference point) more than gains by the same amount. In ou particular application it is likely that a zero balance in preliminary tax payments such a reference point. An individual with a preliminary deficit (A) will, therefo perceive a higher marginal value of extra income than someone with a preliminar surplus of the same amount (B). Those with a deficit would consequently be mor inclined to take (legal or illegal) actions in order to reduce their tax liability. Th line of reasoning is put forward in some theoretical studies in the area of prospe theory and tax compliance.1 Recent empirical evidence by Rees-Jones (2014) poin in the same direction. We study the entire population of Swedish taxpayers of working age and their behavior when filing their income tax returns. The high quality tax return data concern the income year 2006 and the tax assessment year is 2007. The Tax Agency reports a preliminary balance in taxes due to the taxpayer before the income tax return has to be filed. The specific action we study is whether and how much taxpayers claim deductions for "other expenses for earning employment income." Such deductions may be accurate, but may also express noncompliance: The Swedish Tax Agency reports that almost all audited claimed deductions for "other expenses for earning employment income" were rejected.2 Figure 1 shows that the probability of claiming a deduction is indeed higher for taxpayers with a preliminary deficit than for those with a preliminary surplus. Each data point in the figure represents the share for taxpayers with a preliminary deficit in SEK 300 intervals.3 1 See, e.g., Yaniv (1999), Bernasconi and Zanardi (2004), and Dhami and al-Nowaihi (2007). 2See Riksskatteverket (RSV) (2001). A more recent follow-up in 2006 drew a random sample of claimed deductions. There were mistakes in 93 percent of the cases. 3 The average SEK/USD exchange rate was SEK 7.38 per USD in 2006. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms 134 AMERICAN ECONOMIC JOURNAL: ECONOMIC POUCY NOVEMBER 2015 We design a quasi-experiment using a regression kink and discontinu to analyze whether the pattern in Figure 1 really is a causal one. This technique allows us to eliminate potential problems of endogeneity an in ways that most previous empirical studies have not been able to behavior to be consistent with loss aversion in the following sense: ta have a preliminary deficit (taxes due) are more likely to claim deductio expenses" than those who have a preliminary surplus (tax refund). Th larger unconditional amounts, on average. None of the covariates exh evolution around zero preliminary balance. Hence, selection is unlikely that we have found evidence of a clear departure from neoclassical as Furthermore, we argue that loss aversion is the most likely candidate the result. To further strengthen the causal interpretation of our find use an alternative instrumental variable (IV) approach. The difference actual and preliminary tax rates is used as an instrument when estimat ity models for claiming a deduction. The results are confirmed using t Our conclusion is, therefore, that there is evidence of loss aversion. We also estimate the coefficient of loss aversion in our empirical an estimate, A = 2.17 for the full sample, is very close to the estimate r Tversky and Kahneman (1992), Â = 2.25. We thus find a causal link from loss aversion to tax filing behavior some other previous empirical studies also suggesting that people who too little in advance preliminary taxes are less likely to comply than th paid too much. These studies do not, however, establish causality.4 To edge there is only one other study which also has established causality aversion and tax filing behavior. Rees-Jones (2014) studies tax shelter US taxpayers. While we study a specific reaction to exogenous ex ante about taxes due, he uses ex post data to conclude that loss averse taxp avoid ending up with taxes due. The major contribution of the paper is thus that we find tax filing be consistent with loss aversion, which in turn has important policy Tax authorities could withhold a little bit too much in order to keep surplus side. This could increase tax payments and reduce the need for deductions are signs of noncompliance, it could also enhance tax mora in the long run (Nordblom and Zantac 2012). However, overwithholdin be used too ambitiously, as that itself could cause credibility problems. The remainder of the paper is organized as follows: We discuss pros and its application to tax compliance in Section I. Section II describes the institutional setting. We then present a simple theoretical model in which the taxpayers' decisions are studied. The model provides predic empirical analysis. Some descriptive results are presented in Section IV presents the empirical results using the regression kink and discontinu 4See, e.g., Chang and Schultz, Jr. (1990) and Persson (2003). There are also experimental stu that advance payments actually matter for compliance, e.g., Robben et al. (1990), Schepanski a and Copeland and Cuccia (2002). This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms VOL 7 NO. 4 ENGSTROM ET AL: TAX COMPUANCE AND LOSS AVERSION 135 A robustness check using an IV approach and our estimates of the coef aversion are found in Section VI. Section VII concludes the paper. I. Prospect Theory A. Theory and Evidence Kahneman and Tversky (1979) defined prospect theory. The eleme marily use are reference dependence and loss aversion. Hence, people comes as gains and losses compared to some reference point and c as more salient than gains. This implies that the utility function is reference point. Although the concept of loss aversion was first intro settings (and has been proposed to explain parts of observed risk aver and Kahneman (1991) show that it can also explain behavior in the abs Many experimental studies have followed the famous mug exp Kahneman, Knetsch, and Thaler ( 1990),5 showing evidence of an endow Tversky and Kahneman (1992); Schmidt and Traub (2002); Gächter, J Herrmann (2007); Abdellaoui, Bleichrodt, and Paraschiv (2007); an Bleichrodt, and L'Haridon (2008) are some studies finding evidence o to various extent in within-subject comparisons. They let the subjects rather few university students) make several choices and conclude t individual makes different choices depending on gains or losses. Cam and DellaVigna (2009) discuss several field experiments that have fou to be consistent with loss aversion and other components of prospec (2003, 2004) finds in his field experiments that there is a pronounce effect (like the one found by Kahneman, Knetsch, and Thaler 1990) perienced subjects, but that experienced subjects behave in line with theory. However, Pope and Schweitzer (2011) find that even highly professional golfers exhibit loss aversion. Crawford and Meng (2011) f dependence among New York cab drivers in a study where they con tion in an elegant way. Fehr and Goette (2007) study bicycle messen that a majority are loss averse, which explains their behavioral resp increase. Genesove and Mayer (2001), who study sellers of residentia find loss aversion where the purchase price seems to be the relevant r B. Tax Compliance and Prospect Theory Some theoretical studies in the area of prospect theory that focus o ance suggest the following line of reasoning: Loss aversion implies t vidual values losses compared with the reference point more than gai amount. An individual with a preliminary tax deficit (more taxes du fore, perceive a higher marginal value of extra income than an indi 5 Half of the subjects were given a mug for which they were then asked to give a selling p asked for their willingness to pay for a mug. The price mentioned by the former group widel mentioned by the latter. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms 136 AMERICAN ECONOMIC JOURNAL: ECONOMIC POUCY NOVEMBER 2015 preliminary tax surplus (some taxes will be refunded) of the s with a preliminary tax deficit would consequently be more inc chance of noncompliance.6 Although Elffers and Hessing (1997 payments promote compliance, they also point to the fact that w may make people feel wrongly treated, which has an opposing e Experimental studies find that advance tax payments actually ance in a fashion consistent with loss aversion.7 Previous studi data suggest that people who have paid too little in preliminar less likely to comply than those who have paid too much.8 Non studies can, however, establish a causal relationship.9 Rees-Jones (2014) is a recent contribution that is relevant to o lishes a causal relationship between loss aversion and tax shelte to reduce tax liability, and concludes that taxpayers behave in a when filing their tax returns. His approach is different from o ing system is different from the Swedish. He considers measu by the taxpayer and studies the resulting balance due. The con implied sheltering is higher in the loss domain although he cann specific actions. In our study, we concentrate on one specific tax which we can observe, namely claiming a deduction for other ex employment income. We study how this is affected by fully ex from the Swedish Tax Agency before tax returns are to be file reveals whether you initially are in the loss domain or in the g how much. We drop taxpayers who we suspect might have taken measures from our dataset to get the mechanisms as clean as po below. Hence, our analysis is more direct than the approach in II. Data and Institutional Setting Our entire dataset covers all 4.7 million Swedes 16-67 year ment income and without any business income, filing their tax the income year 2006. We have access to a limited number o employment income, marginal tax rate, gender, age, claimed d expenses for earning employment income," and the preliminar due. Taxable employment income includes salaries, social insur fits (such as sickness benefits and parental benefits), and unem reduced by the basic exemption.10 It also includes pensions, bu 6See, e.g., Elffers and Hessing (1997), Yaniv (1999), Dhami and al-Nowaihi (20 Zanardi (2004). 7See, e.g., Kirchler and Maciejovsky (2001), Schepanski and Shearer (1995), R Copeland and Cuccia (2002). See, e.g., Cox and Plumley (1988), Chang and Schultz, Jr. (1990), and Persson (200 9 That receiving a refund or having taxes due affects people's behavior has previously ing other issues than compliance. Feenberg and Skinner (1989) find that owing a balance prompts greater contributions to individual retirement accounts. Feldman (2010), howev tax withholding while marginal tax rates were preserved, instead leads to reduced IRA c 10We do not have information on employment status, such as unemployment or sick This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms VOL. 7 NO. 4 ENGSTRÖM ET AL.: TAX COMPLIANCE AND LOSS AVERSION 137 expected to have salary income and, therefore, any other expenses tor earnin employment income. This explains the upper age limit in our sample. The decision we study in this paper is whether or not the taxpayer claims deduction for "other expenses for earning employment income" when filing their tax return. Filing the tax return is one event in the annual sequence of taxpaying:1 employers withdraw preliminary taxes before the salary is paid to the employees The Tax Agency decides on tax tables specifying employee tax withholdings, i.e., the amount that should be submitted directly to the Tax Agency.12 Hence, taxpayin is typically perceived as automatic for Swedish taxpayers, i.e., there is no need to take any action of their own. In April the following year, the Tax Agency sends a preliminary income tax return to the taxpayer. This tax return is based on the statements of income that the Tax Agency has received from employers, banks, etc. Virtually all incomes are speci fied on the tax return form, based on information reported through the legislated reporting system. Moreover, the Tax Agency calculates a preliminary balance in taxes due (actual tax liability—preliminary payments made), which is also written on the tax return. Since preliminary income tax is withheld at source according to the Tax Agency's tables, the preliminary balance is close to zero for most taxpayers The preliminary balance may, however, show a deficit (more taxes due) or a surplu (there will be a tax refund). When filing a tax return, the taxpayer may add missin information. Because of the extensive reporting by employers etc., the taxpayer doe not usually have much information to add, but could for instance claim deductions for "other expenses for earning employment income." The filing deadline is May 2. After this date, the Tax Agency calculates the fina tax for the taxpayer, which depending on the preliminary tax payments may be either a surplus or a deficit. Surpluses are refunded to the taxpayer's bank account i June or August. If there is a deficit, the taxpayer has to pay the balance in November or December.13 For the taxpayer there is almost no administrative cost in either case. In case of a deficit, the taxpayer receives a payment slip from the Tax Agency. The Swedish income tax system is dual in nature. Capital income is taxed at a flat national rate of 30 percent, while employment income is taxed progressively and by both the local governments (municipalities and county councils) and the central government. Moreover, income taxes are based on individual, and not on household income. Most Swedes only pay the local employment income tax, which in 2006 ranged from 28.80 to 34.24 percent. The local government employment income tax consists of two parts—the municipality employment income tax and the county council employment income tax. High-income earners pay an additional 20 percent in central government employment income tax on the part of their taxable emplo ment income that exceeds a threshold that was SEK 306,000 in 2006 and another 11 See also the information from the Tax Agency reproduced in online Appendix A. 12Analogous principles apply for capital income taxation (interest received and paid, dividends, etc.). As Sweden has a dual income tax system, all capital incomes are taxed at source with 30 percent. 13 The interest paid on surpluses and the interest levied on deficits are independent of the filing date. However for deficits smaller than SEK 20.000, no interest has to be paid if the taxes due are paid by May 4th at the latest. deficit is an interest-free loan for quite some time whereas a surplus yields interest from quite early on during th year. Online Appendix A presents the details that applied during the assessment year 2007. Therefore, the issues that Slemrod et al. (1997) and Jones (2012) discuss for the United States do not arise in the same way in Sweden. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms 138 AMERICAN ECONOMIC JOURNAL: ECONOMIC POUCY NOVEMBER 2015 5 percent on the taxable employment income that exceeds was SEK 460,600 in 2006.14 Hence, the Swedish employm gressive with three brackets. Threshold incomes are the sam whereas the local employment income tax varies across the c About 75 percent of the taxpayers in the 4.7 million employment income lower than SEK 306,000 and therefore ment income tax, which on average is 32.8 percent. The sh have a taxable employment income in the interval SEK 3 18 percent. These taxpayers pay the local income tax plus a their taxable employment income in excess of SEK 306,0 The marginal tax rate in this second tax bracket is 52.8 per remaining 6 percent of the taxpayers have a taxable emplo than SEK 460,600. These taxpayers pay the local governmen central government income tax of 20 percent of taxable emp SEK 306,000 and an additional 5 percent on taxable emp SEK 460,600. The average marginal tax rate in this third tax Final taxes on employment income are determined by the earned during the full year. However, preliminary taxes on paid monthly by employers and are estimated assuming the employment income every month throughout the year. Dev nary and final taxes are in most cases small and exogenous t So why may preliminary tax balances deviate from zero at government part of the employment income tax is levied is a actual tax rates are set with two decimals of a percentage (fo or 31.12 percent). The tables for preliminary taxes are, h ing integer percentages tax rates at source (for example, 31 municipalities for which the tabled tax rates at source are ab tend to pay too much in preliminary taxes. The opposite ap municipalities with actual rates higher than the rates used a that a higher share of those having the preliminary tax rat preliminary surpluses than those having the preliminary t wards. The difference is 3.1 percentage points. The local tax rate is the result of decisions in two separate ipality and the county council (covering several municipaliti 290 municipalities in 20 counties. Thus, it would be extreme municipality to set the local tax rate strategically trying to ples for taxation at source. This would require correctly pre response of the county council. It would be even more diffic cil to act strategically in this respect, since it would involve of several municipalities. It would, consequently, also be very to predict where to move to take advantage of a lower preli it should be reasonable to assume that the actual tax rate is individual taxpayer. 1 In 2006, it corresponded to US$41,460 and US$62,410, respectively. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms VOL. 7 NO. 4 ENGSTROM ETAL. : TAX COMPLIANCE AND LOSS AVERSION 139 0.02: Preliminary tax rate above actual tax rate 0.005 -6 -4-2 0 2 Preliminary Figure 2. Relative Frequency Distributions for Taxpayers with Preliminary Tax Rates Rounded Upwards and Downwards From Figure 2 it is also apparent that the rounding error is hardly the only of deviation between preliminary taxes and final taxes. The progressive centra ernment part of the employment income tax is another possible reason why t ance may deviate from zero. Employers withhold preliminary taxes according t Tax Agency's tax tables, which assume that the income stays the same every m If income varies a lot during the year, the tax withholdings may be misjudged preliminary taxes may be higher or lower than final taxes. For taxpayers cl the thresholds between the tax brackets, unanticipated events may create a no balance. Benefits from the social insurance systems are included in employm income, but the replacement rates are below 100 percent. Absenteeism may fore affect the preliminary balance and so may overtime work. A taxpayer varying employment income over the year will tend not to pay the same amo preliminary taxes as a taxpayer with the same annual employment income e distributed over the year. Flaving several employers might also result in insuf withholdings at source. If every employer withdraws taxes as if they were th employer, progressivity may result in not enough preliminary taxes being paid Deviations from a zero preliminary balance may also arise from capital inc taxation. Interest on loans is deductible at the 30 percent capital income tax which is not automatically taken into account in the preliminary taxes. Taxp who pay deductible interest may therefore have preliminary surpluses. Unfortunat we do not know the taxpayers' deductible interest payments, so we cannot dir control for this in our analysis.15 This is probably an important source of he neity in the preliminary balances and may explain why a majority have a prelim 15 On a macro level during 2006, however, 4.7 million of the total Swedish population had deductible in payments, i.e., a majority of the taxpayers. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms 140 AMERICAN ECONOMIC JOURNAL: ECONOMIC POLICY NOVEMBER 2015 Table 1—Construction of the Sample N AN Original sample 4,674,003 Advance payments - 310,094 Missing values for preliminary deficit —281 Taxable employment income < SEK 100,000 —735,952 Taxable employment income > SEK 1,000,000 —16,704 Full sample 3,610,972 surplus. for the the total Since most taxpayer tax taxpayer to precisely liability. Our objective is to study th fore want to exclude individ This is an important differe means to affect the balance Agency to be exogenous to exclude some taxpayers from Our original sample consi ment income and without a taxpayers as they can affec then exclude taxpayers who the Tax Agency at their ow The reason is that these adva deductions. The preliminary ers. We exclude them from t analysis. Finally, only taxpayers with "normal" annual taxable employment incomes are included in our sample. We interpret normal annual taxable employment income to be in the interval SEK 100,000-1,000,000.17 These selection criteria leave us with a full sample of 3.6 million taxpayers. Descriptive statistics for the full sample are presented in Table 2. These 3.6 million taxpayers are studied with respect to deduction behavior. Taxable employment income could be reduced through approved deductions for "other expenses for earning employment income" exceeding SEK 1,000 during the income year 2006. The expenses thus did not have to be large and the specifications 16 There are incentives for taxpayers with preliminary deficits larger than SEK 20,000 to make advance tax payments before mid-February to avoid having to pay extra interest. See online Appendix A for more information on interest rates, etc. 17This corresponds to an annual income of US$13,550-$135,000 in 2006. Less than 0.5 percent of our sample had incomes exceeding SEK 1,000,000. On the other hand, about one-sixth had an income lower than SEK 100,000. However, we need to exclude those with the lowest incomes since there will be a nontrivial share that bunch at exactly zero preliminary balance simply because they have zero tax liability. Where the exact cutoff should be is, however, not easily determined. We therefore made robustness checks based on a SEK 50,000 cutoff instead and the results remained almost the same. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms VOL. 7 NO. 4 ENGSTRÖM ETAL. : TAX COMPLIANCE AND LOSS AVERSION 141 Table 2—Descriptive Statistics Full sample Maximum bandwidth sample* Preliminary deficit Preliminary surplus Preliminary All deficit Preliminary surplus All 810,690 2,800,282 370,929 822,686 Deducting, fraction 0.062 0.044 0.048 0.061 0.042 Deduction, SEK 1,000, conditional 4.72 3.56 3.89 4.21 3.71 3.91 (4.32) (3.34) (3.69) (3.81) (3.40) (3.58) Number of observations Preliminary balance, SEK 1,000 Taxable employment income, SEK 1,000 -10.76 (51.23) 280.1 (136.1) 0.48 Men, fraction Age, years Marginal tax rate, percent Municipal tax rate, percent 3,610,972 6.55 2.67 (6.76) (26.02) 269.1 (115.1) 272.1 (120.1) 0.49 0.49 -1.29 (1.14) 278.1 (131.1) 0.49 1,193,615 0.048 1.61 0.71 (1.15) (1.77) 277.1 (119.1) 0.50 277.1 (123.1) 0.49 46.8 42.0 43.1 44.9 43.1 43.7 (12.5) (12.1) (12.3) (12.5) (12.3) (12.4 39.6 37.5 38.0 38.7 37.9 38.1 (8.8) (9.1) (9.6) (9.1) (9.3) 32.8 32.8 32.8 32.8 32.8 32.8 (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (10.0) Note: Mean (standard deviation). *Sample selection criterion: weighted preliminary balance in the interval ± SEK 3,000. were quite vague.18 Hence, there was room for (small scale) tax noncompliance by means of this deduction. There are some studies of randomly audited claimed deductions for "other expens es."19 The overall finding is that 90-95 percent of the claims were not approved. In some cases, the taxpayer may simply not understand the rules and believe that he is entitled to the deduction. The taxpayer may knowingly take a chance in other cases. We cannot, therefore, know whether certain deductions are due to tax evasion, tax avoidance, or something else. Some claimed deductions are, however, clearly not due to noncompliance. This is likely to be true especially for large claimed deductions. Large deductions are more often accurate than small (Persson 2003). This is an important reason for only including relatively small deductions for "other expenses." Hence, we concentrate on deductions smaller than SEK 20,000. It was almost without risk to claim small incorrect deductions in 2007 as the audit probability was very low for small claimed amounts. Moreover, the taxpayer was only required to pay the increased tax liability if the claimed deduction was audited and not approved. There were no fines for incorrectly claimed deductions of small amounts.20 Neither were there any fines for large rejected deductions provided 18 Some examples that could be approved are expenses for safety equipment, safety clothes, tools, and instru ments related to work not paid for by the employer, expenses for an office if the employer does not provide one (an office at home is not approved in general), expenses for books and journals related to work for some occupations if not paid for by the employer, and expenses for phone calls related to work if not paid for by the employer (not the phone and not fixed costs for phone service). No receipts have to be submitted to the Tax Agency, but they need to be ready to show in case of an audit. 19See Riksskatteverket (2001) and Persson (2003). 20The tax law has changed since. The threshold value that expenses have to exceed before the tax liability decreases was increased considerably. It is no longer possible to claim deductions of amounts smaller than SEK 5,000. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms 142 AMERICAN ECONOMIC JOURNAL: ECONOMIC POLICY NOVEMBER 2015 0.25 0.20 0.15 0.10 0.05 0.00 6 8 10 12 14 Deducted amount, SEK Figure 3. Frequency Distribution of Deducted Amounts that the taxpayer could prove having had the expenses for which the deduction was claimed. The choice to claim a deduction was, therefore, completely without risk. The 3.6 million taxpayers in our full sample should not have had perfect knowl edge or control of their preliminary deficit. The closer the preliminary balance is to zero, the more likely it should be that it is truly random whether one ends up with a surplus or a deficit. In part of the analysis we, therefore, focus on taxpayers with a preliminary balance in the interval SEK ± 3,000. There are 1.2 million subjects in this subsample, which we label the maximum bandwidth sample. Descriptive statis tics for this sample are also presented in Table 2.21 Our approach is that the deduc tion behavior of these taxpayers can be viewed as a quasi-experiment. In Table 2, we note that a larger fraction with a preliminary deficit than with a pre liminary surplus claim the deduction, in both the full and the maximum bandwidth sample. We also see that, conditional on claiming a deduction, taxpayers with a preliminary deficit on average claim larger deductions than those with a preliminary surplus. Hence, the unconditional deduction is almost twice as large on the deficit side as on the surplus side. Figure 3 shows the frequency distribution of deductions in the full sample. Most deductions are fairly small and those in the gain domain (the dotted line) are more concentrated than those in the loss domain (the solid line). Suppose that those in deficit had behaved as those in surplus on both the extensive and intensive margin. The overall tax revenue loss due to the deduction would then be 17 percent lower (and the one stemming from those with a deficit would be 46 percent lower). 21 This sample is based on the preliminary deficit being weighted by the taxpayer's employment income for reasons that will be explained in Section IV. Weighting increases the probability of including taxpayers with high employment income in the sample. Employment income and deduction probability are positively correlated. This is the reason why the deduction probabilities reported in Table 2 in online Appendix B are slightly higher than those shown in Figure 1. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms VOL 7 NO. 4 ENGSTRÖM ETAL. : TAX COMPLIANCE AND LOSS AVERSION 143 Just from the descriptives of both samples, we see that among those who ha a preliminary deficit, the probability of claiming a deduction is about 50 percen higher than among those who have a preliminary surplus. Due to this and to the f that they on average claim larger deductions, the average taxpayer on the deficit s reduces his tax payment by twice as much as the average taxpayer on the surpl side by means of the deduction. III. An Illustrative Theoretical Model The purpose of this section is to provide predictions for our empirical exerci We apply loss aversion and reference dependence to a simple model of dec making. Consider a taxpayer i who is about to file his tax return. He receives information about his preliminary tax balance on the tax return. Taxpayer i has taxes due if he has a preliminary deficit, D, > 0, and will receive a refund if he has a preliminary surplus, D, < 0. He compares the preliminary deficit with his reference point. There has been a lot of discussion about what the valid reference point should be.22 Dhami and al-Nowaihi (2007) argue that legal after-tax income should be used as the reference point. This is related to the idea that the reference point should be based on rational expectations (Köszegi and Rabin 2006), i.e., how much the tax payer expects to owe or get refunded. Schepanski and Shearer (1995), however, find that the current asset position is a more relevant reference point for taxpayers than the expected asset position. Hence, like in many other areas, status quo seems to be a natural reference point also when filing tax returns. Also Elffers and Hessing (1997) and Yaniv (1999) argue for status quo as the reference point when analyzing tax compliance. Therefore, we assume that a zero balance is the reference point for the taxpayer when filing their return, an assumption also made by Rees-Jones (2014).23 Hence, if Dt > 0, the taxpayer experiences himself to be in the loss domain. He will be in the gain domain if D, < 0. The value function with reference dependence and loss aversion is: -vD, if D, < 0, (l) v(A) = -AvD, if D, > 0, where A > 1 is the coefficient of loss aversion. We follow, e.g., Benartzi and Thaler (1995), Schmidt and Traub (2002), and Pope and Schweitzer (2011) and assume a linear value function. This implies con stant marginal values. We disregard strict concavity in the gain domain and strict convexity in the loss domain by this assumption. Utility tends, however, to be almost 22 See, e.g., the discussion in Kirchler and Maciejovsky (2001). 23 One could argue that since tax filing is a recurring event, previous preliminary balances may be the relevant reference point. Since our data does not contain information on previous years and our theoretical model therefore is a one-period model, we rule out this possibility in the present paper. In Section VB, however, we present sensitivity analyses allowing the reference point to be endogenous. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms 144 AMERICAN ECONOMIC JOURNAL: ECONOMIC POUCY NOVEMBER 2015 linear over very small intervals. A linear approximation sh since we limit our analysis to a narrow area around zero. A. Whether to Deduct or Not A first step is to predict the probability of claiming a deduction to reduce one's tax liability. The taxpayer's only choice is whether or not to claim a deduction of a fixed amount, ö, which is the same for all taxpayers. We analyze what affects the deduc tion probability. The amount <5 is sufficiently small to ensure that the taxpayer per ceives to be at no risk of being audited if he claims the deduction.24 Claiming the deduction ö comes at a certain cost, c,-. This cost varies across tax payers, ct ^ U[0, c]. It may reflect the administrative cost of claiming the deduction or the moral cost of doing so if the deduction is not legitimate. The deduction is worth tö, where t is the constant marginal tax rate. The taxpayer compares the value of his preliminary tax balance, V(—Dt), to the value if he claims the deduction, V{tô — Dt) — q. He claims the deduction if the latter exceeds the former. There are three different domains where the taxpayer may end up depending on the sign and size of Dt. The three conditions for claiming the deduction S are: A: q < vtö if Dt < 0, (2) B: q < v[tö + D,(A - 1)] if A € (0,f<5], C: c, < XvtS ifD, > tö. The value of the deduction in the three cases a The assumption of a uniformly distributed co conditions (2) to predict the share of taxpayer preliminary deficits. The share is increasing in claiming the deduction in the loss domain is lo A larger share of the taxpayers should, therefo the gain domain. For those with a positive bala should be independent of the preliminary bal The same applies for those with a large prel still will have a deficit even after the deducti Di e (0, f<5], that the share of taxpayers claim liminary deficit: A = v[fj + A(A - 1)], (3) i = v(A-l)>0. 24Contrary to previous studies of tax compliance, we abstract from detection risks in our model. Our main results, however, remain valid even if we include a risky choice of noncompliance. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms VOL. 7 NO. 4 ENGSTRÖM ETAL. : TAX COMPUANCE AND LOSS AVERSION 145 Figure 4. The Value of Claiming a Deduction in Three Cases Depending on the Preliminary Deficit We then predict the pattern for the share of taxpayers claiming the deduction to b as shown in Figure 5. The pattern in Figure 5 can be summarized as follows: PREDICTION 1 : The share of taxpayers who will claim the deduction 6 is larger among those with a preliminary deficit than among those with a preliminary surplus. PREDICTION 2: The probability of claiming the deduction S, as a function of the preliminary deficit, has the shape as in Figure 5 with kinks at D = 0 and at D = td. How important is loss aversion in terms of magnitude? Loss aversion implies that the utility (or value) function is steeper for gains than for losses, but how much steeper? The coefficient of loss aversion, A, should capture this. There is no overall consensus on how A should be measured. Tversky and Kahneman (1992 originally defined it as the ratio of utilities: A = — U(— 1) / C/( 1). Köbberling and Wakker (2005) instead propose the following definition, which is independent of unit of payment: A = U\{0) / t/[(0). This was also informally suggested by Benartz and Thaler (1995). The two definitions are equivalent when the value function is linear. Abdellaoui, Bleichrodt, and Paraschiv (2007) summarize and discuss various methods of measuring A. Our approach is different. We observe a large number of people in the gain domain and in the loss domain. It is, therefore, possible to estimate an aggregate coefficient of loss aversion. We plot the shares claiming the deduction for each leve This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms 146 AMERICAN ECONOMIC JOURNAL: ECONOMIC POUCY NOVEMBER 2015 p(S>0) tS Figure 5. Share of Taxpayers Claiming the Deduction Depending on the Preliminary Deficit of preliminary deficit as sketched in Figure 5. The share claiming the deduction in the gain domain is: (4) /J!S0Ac)dc = x We observe the actual share, X, in our data. Since the cost is assumed to be formly distributed, (4) is easily solved to yield: (5) The share claiming the deduction in the part of the loss domain where D, > tS is: (6) £tUc)dc = y A vtô _ y Equations (5) and (6) then give A = Y/X. Hence, the coefficient of loss aversi simply the ratio between the two shares claiming the deduction. PREDICTION 3: If the cost of claiming the deduction, c, ^ f/[0, c], then the cient of loss aversion, A, is X - I X' where Y is the share claiming the deduction in the part of the loss domain Dj > tö and X is the share claiming the deduction in the gain domain. We will use this prediction to estimate the coefficient of loss aversion, A Section VIB. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms VOL 7 NO. 4 ENGSTRÖM ETAL.: TAX COMPLIANCE AND LOSS AVERSION 147 B. The Amount Deducted In this subsection, we derive the empirical predictions from a more general model. We now drop the assumption of an identical deducted amount and instead let the deducted amount vary between individuals. Assume the deduction cost function Ci = C (Si, Ci), where c is the individual's cost parameter (independent of D by assumption) and 6 is the size of the deduction. F(c, D) is the conditional distribution function of c. As above, we make the key assumption that F(c,D) = F(c), i.e., that the distribution of c is independent of D. In addition, we make the following standard assumptions (in the following, we suppress subindex i): (s > 0 (deductions are costly) (ss > 0 (strictly convex cost function) C > 0 and (sc > 0 for <5 > 0 (costs and marginal costs of deductions increase in c) c = Ç(<5, c) is independent of D. We stick to the same linear value function as in Section IIIA, so the marginal value of a deduction is MVd = Avt on the deficit side and MVS = vt on the surplus side. Given A > 1, it follows that MVd > MVS. The Intensive Margin.—Conditional on claiming a positive deduction, the size (S ) will generally be given by the condition: (7) MV = (s(S,c). However, some individuals will bunch at value of a deduction takes a discontinuou taxpayer who bunches at zero, the above effective marginal value MVb e [MVS, MV Differentiation of equation (7) gives <8> mv > ° LEMMA 1 : Consider an individual i wh less of his initial deficit (Dfi Then 8i{D make a weakly larger deduction on the de This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms 148 AMERICAN ECONOMIC JOURNAL: ECONOMIC POUCY NOVEMBER 2015 PROOF: The result follows directly from equation (8) since MV(D, > 0) is either M MVj,, or MVS (depending on the ex post position), while MV(Dl < 0) - MVS. The Extensive Margin.—When determining whether a taxpayer will claim a d tion or not, we need to compare the total value of a deduction with the total cost total cost is independent of D by assumption, so we only need to focus on the v The total value (V) of a deduction is simply the integral over marginal values, i.e (9) V(D, S) = f°_tSMVdx. LEMMA 2: (/) The value of a deduction will kink upwards at D = 0 when A (ii) The value of making a deduction is always higher for D > 0 than for D PROOF: (i) Equation (9) directly gives Vd(D, Ö) = OifD < 0 Vd(D,S) = MVd - MVS = (A - l)r > OifD = 0. (ii) This follows directly from equation (9) and the fact that MVd > MVS. I Empirical Predictions.—The model renders two empirical predictions that can be taken directly to data. However, before deriving those, we need one last lemma LEMMA 3: A taxpayer i with a given cl will make weakly larger deductions when starting on the deficit side (D, > 0) compared with the surplus side (D, < 0). PROOF: Follows directly from Lemma 1 and 2 above. ■ For the extensive margin we get the following empirical prediction, which analogous to Predictions 1 and 2 above. PREDICTION 4: (/) The share of individuals who claim a positive deduction kink upwards at D — 0. (ii) The fraction of individuals who claim a deduction always be higher on the deficit side. PROOF: Follows directly from Lemma 2 when assuming that F(c) has support in the rel evant domain. I It is natural that the (negative) kink in deduction we found at D = tô (see Figure 5) will not prevail in this more general model where different taxpayers make deductions of different sizes. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms VOL 7 NO. 4 ENGSTRÖM ETAL.: TAX COMPLIANCE AND LOSS AVERSION 149 In addition to this, we find the following empirical prediction concerning th unconditional average deduction size (Eö(c,D)). PREDICTION 5: (i) The unconditional average deduction size will kink upwa at D = 0. (ii) The unconditional average deduction will always be higher on deficit side. PROOF: Follows directly from Lemma 3 and Prediction 4. ■ When turning to the expected size of the conditional deductions (£[<5(c, D)\6 > 0] ) the model does not make any clear predictions. The reason is that there are two c teracting effects. On the one hand, we know that a given taxpayer (i.e., a given will make a larger deduction in the deficit domain. But on the other hand, the age c, among those who claim a positive deduction, will be higher on the deficit since the incentives to claim deductions are higher. Now, since Qc > 0 (the ma ginal cost of a deduction increases in c), this will have a counteracting effect on average size of the conditional deductions on the deficit side. Theoretically, ei effect could outweigh the other. Consequently, we would expect to find both largest and the smallest deductions on the deficit side, while the average conditi deduction size may be both higher or lower on the deficit side. C. Summarizing Theoretical Predictions The model demonstrates that the incentives to claim a deduction are stronger the loss than in the gain domain. The probability of claiming a deduction is hig in the loss domain and kinks at D = 0. Also the unconditional amount deducted is higher in the loss than in the gain domain and also kinks at D = 0. Concerning the conditional amount, however, we do not have any clear theoretical prediction. Assuming that the costs to claim the deduction are uniformly distributed among the taxpayers, the coefficient of loss aversion, A could be estimated as the ratio between the shares of taxpayers claiming the deduction in the loss and in the gain domain. IV. Descriptives Theory predicts that the share claiming deductions, under certain assumptions, could be illustrated as in Figure 5. We note that the actual behavior presented in Figure 1 is very similar to this. A larger share of those with a preliminary deficit claims a deduction for "other expenses" than those with a preliminary surplus. The share claiming a deduction is independent of the preliminary balance for those with a surplus as predicted by theory. Less than 4.5 percent of those with a preliminary surplus claim a deduction for "other expenses." The share is, however, increasing in the preliminary deficit for those with a deficit.25 25 As this kind of deduction was practically riskless, the share of taxpayers claiming the deduction may seem surprisingly low. However, Swedes have a high degree of tax morale in an international comparison. This might This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms ISO AMERICAN ECONOMIC JOURNAL: ECONOMIC POLICY NOVEMBER 2015 120,000 90,000 0 >% 03 CL X Z 60,000 30,000 -3,000 -2,000 -1,000 0 1,000 2,000 3,000 Figure 6. Frequency Distribution of Preliminary Deficits Moreover, theory predicts that more will be deducted in the loss than in the gain domain and also that the amounts are more spread in the loss than in the gain domain. From Table 2 and Figure 3, we learned that not only the share claiming deductions, but also the conditional amount deducted is larger in the loss domain than in the gain domain. Hence, unconditional deductions in the loss domain exceed those in the gain domain as predicted by theory. Although the observed patterns are in line with theory, we cannot be certain that they are caused by the preliminary balance; there may be an endogeneity problem. Plotting the distribution of individuals over preliminary deficits is a simple graphi cal test of this: If the distribution changes dramatically around zero, the individuals slightly above zero preliminary deficit will not be representative of those slightly below. Figure 6 shows that the distribution does not seem to kink or jump at zero, so at first inspection there is no indication of any selection or endogeneity problem. We could, however, still have problems with selection that do not show up in the frequency distribution plot. The individuals slightly below zero could be very dif ferent from the individuals slightly above even if the distribution is smooth around the reference point. We, therefore, need to look closely at how the covariates evolve around the reference point. Suppose there is selection based on any of the covariates or on any unobservable factor that is correlated with the covariates. This would show up as a kink or discontinuity around zero. The pattern in Figure 1 could then be due to selection. If, on the other hand, all covariates evolve smoothly around zero, the deduction pattern is likely to be caused by differences in the preliminary balance. Here we will present descriptive tests if the predetermined covariates show kinks or discontinuities at zero preliminary balance. The formal econometric tests are pre sented in Section V. explain why many do not claim a deduction without actually having had any "other expenses" when the potential gain is only a couple of thousand SEK. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms VOL. 7 NO. 4 ENGSTROM ETAL.: TAX COMPLIANCE AND LOSS AVERSION 151 400,000 [J] W - 300,000 -- -- -- - Weighted a Unweighted 200,000 E > o Q. E 100,000 -3,000 -2,000 -1,000 0 1,000 2,000 3,000 Figure 7. Employment Income as a Function of the Preliminary Deficit Employment income is a crucial variable. The diamonds in Figure 7 show relationship between preliminary deficit and employment income. The kink slig below zero preliminary deficit could be explained as follows. The higher the em ment income, the more difficult it is to calibrate the tax payments at source correct the deviations will be scaled up in proportion to the income. Higher employm income will, therefore, move us further away from zero preliminary balance. Th exactly the pattern we see in the unweighted version of the relationship. The unweighted relationship in Figure 7 suggests that we do not have a rect specification. It could be argued that the marginal utility of claiming a d tion is higher for a low-income taxpayer. The mechanical kink that is visible the unweighted relationship should, however, disappear if we instead mea preliminary deficit in relation to employment income. We therefore define t weighted preliminary deficit of taxpayer i as: (10) 4- = (E/E) x D„ where Di is the unweighted preliminary defic income of taxpayer i, and Ë is average employ liminary deficit disappears when we measure employment income; see the squares in Figure The other conditioning variables do not seem zero preliminary deficit. Figures 4 and 5 in on matter whether we use unweighted or weighte If we weight the preliminary deficit when w the same when studying the outcome variable diamonds from Figure 1, squares showing the similar. Hence, from the graphs we conclude t a lot at the point of zero deficit, while none of This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms 152 AMERICAN ECONOMIC JOURNAL: ECONOMIC POLICY NOVEMBER 2015 0.08, -3,000 -2,000 -1,000 0 1,000 2,000 3,000 Figure 8. The Share Claiming a Deduction as a Function of the Preliminary Deficit This suggests that it is actually the deficit itself that causes the behavioral d ence. However, this is not a formal test, so we continue to the next section, w we use econometric methods to formally test causality. V. Estimations A. Baseline Models In this section we formally test whether the observed relationship between liminary deficits and deductions is causal and not due to selection. We follow s of the empirical strategies suggested in previous work on the regression discont ity design (Lee and Lemieux 2010) and regression kink design (Card, Lee, and Pe 2009). The empirical tests essentially consist of answering two questions: • Does the relationship between the preliminary balance and deductions have statistically significant kink or discontinuity around zero preliminary balan Can we rule out corresponding statistically significant kinks or discontinuiti for the predetermined covariates? If the answer is "yes" to both these questions, it is reasonable to interpret t relationship as causal. We will study three, closely related outcome variables that were included in th theoretical section: the probability of claiming a deduction—the extensive mar the unconditional amount deducted; and the amount deducted, conditional on cla ing a deduction. Recall that the theoretical model predicted positive kinks at ze preliminary deficit for the first and second outcomes (the extensive margin and unconditional size of deductions), while the theoretical predictions for the third come (the conditional size of deductions) were ambiguous. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms VOL. 7 NO. 4 ENGSTROM ETAL.: TAX COMPUANCEAND LOSS AVERSION 153 Recall that theory does not predict any discontinuities at zero p ance in the relation between preliminary deficit and any measure of completeness, however, we also allow for potential discontinuit metric specification. A positive discontinuity in, e.g., the probabi a deduction would be consistent with a fixed subjective cost of en preliminary deficit—a fixed cost of "losing." Even though such m predicted by ordinary loss aversion, it would still be a clear indicat dependence. Formally, we estimate spline models of the following type (the a ates: age and gender are suppressed): (11) A,- — "Y^ctkdj -F ^jßklidf + €j, k=0 where 4 is A, the is k=0 the outcome (weighted) measures the variable, preliminary intercept, ß0 /, is def measures (zero preliminary deficit), and ß\ m The polynomial k ranges from 0, w nuity at zero preliminary balance, t ification should be appropriate very flexible specifications, in particular We iterate the estimation of each o many bandwidths. Bandwidths go f most and SEK ± 500 at the least. W ence point.26 A bandwidth of SEK with weighted preliminary balance A large bandwidth gives a larger sam A smaller bandwidth, on the other h estimates. There are 1.2 million taxp ± 3,000) as previously mentioned. 200,000 taxpayers with weighted p The optimal nonzero polynomial m determined based on minimizing a mation criterion weighs better good is a modification freedom the data two harder. best; (zero). of only Based the Akaike Overall, for on the very these info SBC large m (s findings, estimates based on the linear mode linear model are reported for a rang Our primary interest is in the ß\ e tions from Section III. The ßx param 26We use a logarithmic scale when we iterate ov at lower bandwidths than at higher bandwidths a This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms 154 AMERICAN ECONOMIC JOURNAL: ECONOMIC POLICY NOVEMBER 2015 2.9 2.5 2.2 1.9 1.6 1.4 1.2 1.1 0.9 0 Bandwidth, SEK thousands Figure 9. Kink—Estimates of 0t on the Probability of Deducting the reference point or, in other words, the kink. As mentioned above, we are also interested in whether there is a discontinuity at the reference point. This is measured by ß0. Figures 9, 10, and 11 report our estimates of a possible kink at zero preliminary balance, for the three separate outcome variables. Starting with the extensive mar gin—the probability of claiming a deduction—we find the following. The estimated kink is significant for all bandwidths except around SEK 700. The thick solid line reports the estimated coefficients while the thin lines provide the limits of 95 percent confidence intervals. The estimated coefficients remain stable and positive in a wide range of bandwidths from SEK 2,500 to SEK 800. The estimate starts to fluctuate a lot for very narrow bandwidths. However, the overall pattern indicates a stable and significant positive kink in the deduction probability. Turning to the second outcome variable—the unconditional deduction amount— we find a very similar pattern. As seen in Figure 10, we estimate a positive and stable kink throughout the whole range of bandwidths. The optimal model is linear for bandwidths above SEK 800 and the estimates are significant for bandwidths above SEK 900. We thus find clear evidence of a positive kink in the unconditional deducted amounts. For the third outcome variable—the amount deducted, conditional on deducting— the results are much less clear, however. From Figure 11 it is apparent that the kink estimates are generally insignificant and the point estimates fluctuate between pos itive and negative. It is only for bandwidths above SEK 2,000 we find positive and significant kink estimates. Furthermore, the zero order model is optimal for band widths below SEK 1,800. It is also possible, though our theory does not predict so, that there is a discon tinuity in the relationship between the preliminary deficit and our three different This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms VOL. 7 NO. 4 ENGSTROM ETAL.: TAX COMPLIANCE AND LOSS AVERSION 155 200 150 100 50 — ^ , ,y >✓ 2.9 2.5 2.2 1.9 1.6 1.4 1.2 1.1 0.9 \0.8 JQ.7 O.e * 0.5 -50 -100 Bandwidth, SEK thousands Figure 10. Kink—Estimates of ß\ on the Unconditional Amount Deducted 600 ' 400 - 200 c 0) o 3= © O 2.9 2.5 2.2 1.9 1.6 1_.4^^1.2 TO CD ra -200 E "So LU —400 -600 -800 ' Bandwidth, SEK thousands Figure 11. Kink—Estimates of on the Conditional Amount Deducted measures of deductions. Figures 1-3 in online Appendix B report our of these. The empirical evidence of discontinuities at the reference point i rather weak compared with the evidence of kinks. We find the strongest e a discontinuity for the extensive margin, i.e., the probability of claimin tion. Concerning the unconditional amount of deductions, Figure 2 shows pattern. The discontinuity estimate decreases when the bandwidth decrease overall level of significance is lower than in Figure 10. Finally, we find no at all of a discontinuity in the conditional amounts. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms 156 AMERICAN ECONOMIC JOURNAL: ECONOMIC POUCY NOVEMBER 2015 We now turn to the corresponding estimates for the three covari responding to Figures 9-11 and the figures in online Appendix B a online Appendix C. The results for employment income show that t is negative and significant for bandwidths between SEK 2,700 and polynomial order would, in fact, be optimal for smaller bandwidths ity estimate is only significant for a narrow range of bandwidths be and SEK 1,000. We continue with the gender indicator. The opti order is always one. There is a significant negative kink for large discontinuity estimates are almost always insignificant. The corresponding results for age show decreasing kink estimates lower than SEK 2,500. The estimates become insignificant belo of about SEK 1,400. The optimal polynomial order is one except bandwidths. The discontinuity estimates are insignificant for band SEK 1,900. Let us compare the results for the two outcomes where our theory (the extensive margin and the unconditional deduction amounts) w sponding results for the covariates. The estimated kinks for the cov more unstable. The results for the deduction probability and uncond show a stable and significant kink for a wider range of bandwidth covariates. Hence, these results suggest that we can make a causal i the pattern we see in the data. However, the kinks for the covariate about omitted factors. This is one of the motivations for the sensitiv follows. B. Sensitivity Analysis—Placebo Kinks and Discontinuities The above analysis shows that the patterns predicted by prospect theory are sup ported by data.27 However, we also find evidence of kinks and discontinuities— albeit unstable over different bandwidths—for the covariates. This could be a sign of selection. On the other hand, there is a risk that even small and economically insig nificant estimates become statistically significant when the sample size is very large. It is thus relevant to ask whether kinks and discontinuities at the zero reference point are more pronounced than kinks and discontinuities at other reference points. We, therefore, present estimates of kinks and discontinuities based on a range of different placebo reference points. We let the reference points vary between SEK —3,000 and SEK 3,000. The bandwidth—symmetric around the placebo refer ence points—is fixed at SEK 1,000 in all regressions. The analysis serves several closely related purposes. The evidence of causal effects becomes stronger if we find that the kinks and discontinuities in deduc tion measures (deduction probability and unconditional deduction size) are more pronounced for the theoretically predicted reference point than elsewhere. We might also fear that selection is driving the increase in deduction probability around zero 27The main analysis is made on all Swedes of working age, i.e., 16-67, but the results are robust to narrower age grouping as well, such as 18-64 or 25-59 years. Results are available on request. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms VOL. 7 NO. 4 ENGSTRÖM ETAL. : TAX COMPLIANCE AND LOSS AVERSION 157 if the kinks and discontinuities for the covariates are more pronounced around than elsewhere. Figure 12 in online Appendix D shows the estimated kinks in deduction proba bility for different placebo reference points. The kink-estimates peak slightly below zero at a reference point of SEK —180, which we interpret as zero.28 When the pla cebo reference point enters the deficit side, the kink estimates turn negative and sig nificant for reference points in the range SEK 500-1,000. This is consistent with the concave increase in the deduction probability for those with a preliminary deficit; see Figure 1. The information criterion prefers a zero polynomial order for reference points above SEK 1,700 and below SEK 1,000, and the linear model is preferred elsewhere. The corresponding discontinuity estimates mirror the kink estimates. There is a local peak in the discontinuity estimates for reference points close to zero (see Figure 13 in online Appendix D). Turning to the placebo estimates for the unconditional amounts, we find a sim ilar pattern. The kink estimates peak slightly below zero preliminary deficit, just as theory predicts. There are no significant kinks or discontinuities elsewhere (see Figures 14 and 15 in online Appendix D). The last outcome variable, the conditional amounts, shows no significant kinks or discontinuities at all (see Figures 16 and 17 in online Appendix D). This is also in line with the theoretical predictions. To sum up the placebo estimations for the outcome variables, we can conclude that the results for the three outcome variables are in line with theory. We now turn to the corresponding analysis of the covariates (online Appendix D has the figures). We find that neither kink nor discontinuity estimates are more pro nounced around the zero reference point than elsewhere for any of the covariates. We, therefore, conclude that selection is a very unlikely source of the increase in deduction probability around zero. It would require very strong selection on some unobservable factor to produce the pattern we see in Figure 1. It is hard to come up with a candidate for such an unobservable factor. It is even harder provided that it also needs to be virtually uncorrelated with employment income, gender, and age. Flence, the deduction pattern is highly consistent with loss aversion where it is a salient difference to people whether they will get a refund or have to pay more. VI. Extensions A. An Alternative IV Approach The analysis in Section V strongly indicates that taxpayers behave in a loss av manner when filing their tax returns. We find significant kinks and discontinu in deductions, while the results for the covariates are less pronounced. Howev they are not completely absent and although our placebo estimates suggest that actually have causal effects, we also use an alternative IV strategy to corroborat results. Using this alternative IV estimation, we are also able to estimate the co cient of loss aversion, (A). 28 Incomes are rounded down to the nearest SEK 100 and refunds lower than SEK 100 are not paid out deficits lower than SEK 100 are not claimed), so a preliminary balance e (-200,200) could be regarded as This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms 158 AMERICAN ECONOMIC JOURNAL: ECONOMIC POUCY NOVEMBER 2015 The IV estimation makes use of the difference between t ment income tax rate and the local employment income tax r taxation at source that was discussed in Section II. Actual lo ment income are set with two decimals (for example 30.83 p rates at source, on the other hand, are rounded to the clos 31 percent). Taxpayers will tend to pay too much in prelim in municipalities where tax rates at source are above the ac the case in 151 of the 290 municipalities in 2006. The prelim therefore, tend to be in surplus. The opposite applies to taxp with actual rates above the rates used at source. We use the difference between the actual and the preliminary rates as an instrument for a preliminary deficit indicator when estimating probability models for claiming a deduction.29 We use two differ ent instruments for the preliminary deficit indicator in the IV analysis: the difference between the preliminary and actual local tax rates; and the interaction between the first instrument and employment income. The second instrument can be interpreted as the impact of the rounding on the preliminary balance—theoretically, the round off error should matter more for high income earners than low income earners. The IV analysis uses the full sample of 3.6 million taxpayers. The reason for using the full sample is that sample inclusion should not be endogenous to the instrument.30 The OLS and baseline IV estimate use the standard set of controls, which now also includes employment income; see the notes to Table 3 for details.31 The models with interacted treatments also include all relevant interacted controls and instruments. The upper part of Table 3 reports the estimation results for the probability of claiming a deduction. The OLS estimate shows that having a preliminary deficit increases the probability of claiming a deduction by 2.0 percentage points. This estimate cannot, however, be causally interpreted since preliminary deficit may for other reasons be correlated with the probability of claiming a deduction. The causal estimate given by the IV estimation suggests an even stronger effect. We estimate an impact of 5.0 percentage points. The loss aversion effect is probably stronger for individuals close to zero (the salient reference point). Individuals fur ther away from the reference point (both on the positive and negative side) probably know which side of zero they will end up. When we simply compare the left-hand side and right-hand side (i.e., OLS), these individuals will attenuate the estimate. The IV estimate instead identifies the local average treatment effect (LATE), i.e., for individuals close enough to zero so that the rounding error is pivotal for preliminary deficit or surplus. The estimation reported in the third column of Table 3 shows that there is a sig nificant kink in the relationship between the probability of claiming a deduction and the value of the preliminary deficit at zero preliminary deficit. The third column addresses the exclusion restriction by focusing on the relationship above and below 29 In terms of our covariates, the municipalities rounding up and down do not differ statistically from each other. 30Note that the rounding off error affects the preliminary deficit. This means that sample inclusion based on a bandwidth in the preliminary deficit dimension could make the rounded up sample different from the rounded down sample in terms of unobservable characteristics. Employment income was excluded from the Regression Kink and Discontinuity (RKD) models above since they were based on the preliminary deficit weighted by employment income. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms VOL. 7 NO. 4 ENGSTRÖM ETAL. : TAX COMPLIANCE AND LOSS AVERSION 159 Table 3—The Probability of Claiming a Deduction, IV Approach, Full Sample OLS IV IV IV, gender IV, age IV, income (1) Positive deficit, (2) 0.020 0.050 preliminary /, indicator (0.000) (0.006) (3) -0.027 (0.046) (4) (5) (6) 0.048 0.055 0.047 (0.007) (0.010) (0.007) -0.0044 Preliminary deficit, £>,, (0.0022) amount Interaction: 0.023 I x Dh amount (0.0059) Interaction indicators 0.009 I x Man, indicator (0.013) / x Old (age >= 40), -0.005 (0.013) indicator 0.034 / x High income (0.017) (> SEK 306,000), indicator F-stat, first stage 3,387 Overidentification test, p-value Minimum eigenvalue statistic 0.798 (0.01) A, men/old/high income A, women/young/low income 1,637 1,356 1,354 0.356 0.708 0.302 4.33 1.43 A 0.449 2.17 (0.18) 1.97 2.00 2.47 (0.21) (0.21) (0.38) (0.40) (0.38) (0.51) 2.91 2.66 3.42 Notes: Number of observations is 3,610,972. Heteroscedasticity-corrected standard errors are in parentheses. Baseline instruments are the difference between actual local tax rate and preliminary local tax rate, and the tax rate difference times employment income. Baseline covariates are age. age2 employment income, (employment income)2, and gender. Model 3 uses additional instruments that consist of three nonlinear transformations of the baseline instruments: (i) indicator for higher actual local tax rate than preliminary local tax rate; (ii) and (iii) consist of the baseline instru ments interacted with (i). zero preliminary deficit. Compared with the kink estimates reported in the main analysis, the IV kink estimate is somewhat larger and less precisely estimated, but of the same overall magnitude. The result supports the interpretation that the prob ability of claiming a deduction increases substantially when an individual exoge nously locates in the loss region. This model includes three endogenous regressors and we only have two baseline instruments. We solve this technically by adding nonlinear transformations of the two baseline instruments (see Table 3 for details). As a result, the strength of the instruments is substantially reduced; Stock and Yogo (2005) report a bias of around 30 percent for a minimum eigenvalue statistic of 4.3 in a model with three endogenous regressors and five instruments. The remaining columns in Table 3 report IV estimations that test for possible dif ferences between different subgroups in our sample. From the estimation reported in column 4, we conclude that there are no significant gender differences. Column 5 pres ents the results from a corresponding estimation where we test whether the response of those older than 40 years differs from the estimated response of younger taxpay ers. The results suggest that there are no such differences. We do find, however, that there is a significant difference in response between those with employment income This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms 160 AMERICAN ECONOMIC JOURNAL: ECONOMIC POUCY NOVEMBER 2015 higher than SEK 306,000 (the threshold for the central government those below this threshold. Those above the threshold have a 20 pe higher marginal tax rate than those below it. The response of those tax rate is (both economically and statistically) significantly strong with theory, since the marginal value of the deduction is higher abov The corresponding IV estimations of unconditional and condit respectively, are also in line with the primary results in Section V mate a significant kink at zero concerning the unconditional amou tional amounts, albeit larger on the deficit side, do not display a sig the reference point. The results are available upon request. B. Estimating the Coefficient of Loss Aversion Ihe coefficient or loss aversion (A) can be expressed in a simple w to Prediction 3: the share of taxpayers claiming a deduction in the l sufficiently large preliminary deficits) divided by the share of taxp deduction in the gain domain. We use the IV estimation reported in T to calculate these shares. We estimate the probability of claiming a deduction for a taxpayer with a prelim inary surplus and average values of the covariates to 4.23 percent in our full sample of 3.6 million taxpayers. The standard error of this estimate is 0.001. The corre sponding probability of claiming a deduction for an average taxpayer with a prelimi nary deficit is 9.19 percent, with a standard error of 0.005. Given these assumptions, our estimate of loss aversion is: (!2) Â = I = « 2.17. We calculate the standard error of this ratio using the delta method. The resultin estimate of the standard error is 0.184. The lower part of Table 3 presents our estimates of the coefficient of loss aver sion, A. We estimate A to be higher for women than for men, 2.91 versus 1.97. This difference is statistically significant at the 5 percent level according to a t -test. This test takes potential covariances between the estimated parameters into account. It is possible to do this as we have estimated the response of men and women in the same model. The estimated A is higher for young than for old. This difference is, however, not statistically significant at the 5 percent level according to the t -test. There is, on the other hand, a statistically significant difference in the estimated A between those with an income higher than the central government tax threshold and those with lower income. The estimated A of taxpayers with lower income is much higher. This may seem surprising as the estimated effect of preliminary deficit was significantly higher for the high-income group. But the A estimate is a ratio, so we need to con sider differences in both the numerator and the denominator. The high A estimate for the low-income group is because the deduction probability for those with a prelim inary surplus is only about 1.7 percent. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms VOL. 7 NO. 4 ENGSTRÖM ETAL.: TAX COMPLIANCE AND LOSS AVERSION 161 Our estimates are all in the range in the literature. Different definitions and di ferent questions and samples have, however, given rise to quite disperse estimate of A. The most frequently cited estimate is by Tversky and Kahneman (1992). They report A = 2.25 using experimental data. Each individual was observed in bot the gain domain and the loss domain. Our overall estimate, A = 2.17, is very close to this. Abdellaoui, Bleichrodt, and Paraschiv (2007) cite various studies wher the estimates of A range from 1.4 to 4.8 in risky settings. Gächter, Johnson, an Herrmann (2007) estimate an average A = 2.6 for the risky setting and A = 2 for the riskless. Our finding that women are more loss averse than men is similar to that of Schmidt and Traub (2002). Yet, Gächter, Johnson, and Herrmann (2007) find no significan gender difference once controlling for other covariates. We have access to very few covariates, which may partly explain why our results differ. VII. Concluding Remarks We study the vast majority of Swedish working age taxpayers' behavior when f ing their tax returns for the income year 2006. The research method is quasi-expe imental using a regression kink and discontinuity approach. We find behavior to b consistent with loss aversion. Taxpayers who have a preliminary tax deficit are mo likely to claim deductions for "other expenses for earning employment income" than those who have a preliminary surplus. We find a significant change at zero preliminary deficit. The same holds true for the unconditional deducted amount The empirical analysis also makes clear that none of the covariates show a similar evolution around zero preliminary deficit. We can, therefore, rule out selection. Los aversion is the obvious candidate for explaining the result. There are alternative explanations. A first is the existence of liquidity constraint A liquidity-constrained taxpayer would be more inclined to claim a deduction in the deficit domain so as to avoid paying the taxes due. There are, however, several arguments speaking against this explanation. The taxes due in our study are fairly small. Tax payments are not due until the end of the year, so the taxpayer has abou six months to come up with the necessary funds. And finally, we find stronger effects among high-income earners than low-income earners. The former are arguably les credit constrained. The existence of transaction costs is a second alternative explanation. It it would be cumbersome and time consuming to make the payment, taxpayers would try to avoid ending up with taxes due. However, the administration costs for the taxpayer are fixed and very small. It is not more complicated than paying an ordinary bill. Hence, these costs could only explain a discontinuity and not a kink. The same argument applies to any fixed psychological gain/loss that taxpayers may attribute to ending up with a tax refund/taxes due. We, however, only find mixed evidence of a discontinuity, but strong evidence of a kink. This makes transaction costs an unlikely candidate. Finally, one could argue that fairness or reciprocity considerations could explain the deduction pattern if taxpayers feel mistreated by a tax agency that requires more taxes at the end of the year. The theoretical predictions from fairness-based models This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms 162 AMERICAN ECONOMIC JOURNAL: ECONOMIC POLICY NOVEMBER 20/5 are not, however, clear-cut. Alternative stories are poss plus means that the taxpayer has lent money to the go Taxpayers with a deficit have been granted an interest-f apparent that individuals with deficits should feel the treatment. Furthermore, the deduction probability not o preliminary deficit, the marginal increase also seems to This pattern is highly consistent with our model of los at higher deficit levels is not, on the other hand, consi fairness and reciprocity. We also use an alternative IV approach to strengthen th use the difference between the actual and the preliminar for a preliminary deficit indicator. This indicator is used els for claiming a deduction. Our previous results are con We also estimate the coefficient of loss aversion. Our full sample, is very close to the estimate reported by Tv A = 2.25. We use a different approach to estimate this c previous studies. While they typically use experimental dents, we use real-world data for the vast majority of taxpay arrive at results very close to those previously reported. The main contribution is that we have shown that taxp consistent with neoclassical theory when filing their tax to be loss averse. Many (not all, though) claim the studied deduction because of noncompliance. Restricting the possibility to claim this kind of deduction would therefore be a can didate for increased tax payments and tax compliance. In Sweden that has actually been done and it is no longer possible to claim deductions smaller than SEK 5,000, which would include the vast majority of the deductions in our study. A more general implication for tax policy of loss aversion is that a slight over withholding of preliminary taxes would increase tax revenues. Such a policy might also strengthen tax morale and reduce tax auditing costs. Overwithholding should not be made to a too large extent, however, since taxpayers could feel wrongly treated if too much is withheld repeatedly (Elffers and Hessing 1997). A systematic overwithholding could also shift the reference point from being zero to being a cer tain positive amount, so that the effect would disappear. REFERENCES Abdellaoui, Mohammed, Han Bleichrodt, and Olivier L'Haridon. 2008. "A tractable method to m utility and loss aversion under prospect theory." Journal of Risk and Uncertainty 36 (3): 245Abdellaoui, Mohammed, Han Bleichrodt, and Corina Paraschiv. 2007. "Loss Aversion under Pr Theory: A Parameter-Free Measurement." Management Science 53 (10): 1659-74. Benartzi, Shlomo, and Richard H. Thaler. 1995. "Myopic Loss Aversion and the Equity Premiu zle." Quarterly Journal of Economics 110 (1): 73-92. Bernasconi, Michele, and Alberto Zanardi. 2004. "Tax Evasion, Tax Rates, and Reference dence." FinanzArchiv 60 (3): 422-45. Camerer, Colin F. 2000. "Prospect Theory in the Wild: Evidence from the Field." In Choices, V and Frames, edited by Daniel Kahneman and Amos Tversky, 17^13. Cambridge: Cambridg versity Press. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms VOL. 7 NO. 4 ENGSTROM ETAL.: TAX COMPUANCEAND LOSS AVERSION 163 Card, David, David S. Lee, and Zhuan Pei. 2009. "Quasi-Experimental Identification tion in the Regression Kink Design." Princeton University Industrial Relations Sect Paper 553. Chang, Otto H., and Joseph J. Schultz, Jr. 1990. "The Income Tax Withholding Phenomenon: Evi dence FromTCMP Data." Journal of the American Taxation Association 12 (1): 88-93. Copeland, Phyllis V., and Andrew D. Cuccia. 2002. "Multiple Determinants of Framing Referents in Tax Reporting and Compliance." Organizational Behavior and Human Decision Processes 88 (1): 499-526. Cox, Dennis, and Alan Phimley. 1988. Analyses of Voluntary Compliance Rates for Different Income Source Classes. Washington, DC: Internal Revenue Service. Crawford, Vincent P., and Juanjuan Meng. 2011. "New York City Cab Drivers' Labor Supply Revis ited: Reference-Dependent Preferences with Rational-Expectations Targets for Hours and Income." American Economic Review 101 (5): 1912-32. DeliaVigna, Stefano. 2009. "Psychology and Economics: Evidence from the Field." Journal of Eco nomic Literature 47 (2): 315-72. Dhami, Sanjit, and Ali al-Nowaihi. 2007. "Why Do People Pay Taxes? Prospect Theory Versus Expected Utility Theory." Journal of Economic Behavior and Organization 64 (1): 171-92. Elffers, Henk, and Dick J. Hessing. 1997. "Influencing the prospects of tax evasion." Journal of Eco nomic Psychology 18 (2-3): 289-304. Engström, Per, Katarina Nordblom, Henry Ohlsson, and Annika Persson. 2015. "Tax Compliance and Loss Aversion: Dataset." American Economic Journal: Economic Policy, http://dx.doi.org/10.1257/ pol.20130134. Feenberg, Daniel, and Jonathan Skinner. 1989. "Sources of IRA Saving." In Tax Policy and the Econ omy, Vol. 3, edited by Lawrence H. Summer, 25-46. Cambridge: MIT Press. Fehr, Ernst, and Lorenz Goette. 2007. "Do Workers Work More if Wages Are High? Evidence from a Randomized Field Experiment." American Economic Review 97 (1): 298-317. Feldman, Naomi E. 2010. "Mental Accounting Effects of Income Shifting." Review of Economics and Statistics 92 (1): 70-86. Gächter, Simon, Eric J. Johnson, and Andreas Herrmann. 2007. "Individual-Level Loss Aversion in Riskless and Risky Choices." Institute for the Study of Labor (IZA) Discussion Paper 2961. Genesove, David, and Christopher Mayer. 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market." Quarterly Journal of Economics 116 (4): 1233-60. Jones, Damon. 2012. "Inertia and Overwithholding: Explaining the Prevalence of Income Tax Refunds." American Economic Journal: Economic Policy 4(1): 158-85. Kahneman, Daniel, Jack L. Knetsch, and Richard H. Thaler. 1990. "Experimental Tests of the Endow ment Effect and the Coase Theorem." Journal of Political Economy 98 (6): 1325—48. Kahneman, Daniel, and Amos Tversky. 1979. "Prospect Theory: An Analysis of Decision under Risk." Econometrica Al (2): 263-92. Kirchler, Erich, and Boris Maciejovsky. 2001. "Tax compliance within the context of gain and loss situations, expected and current asset position, and profession." Journal of Economic Psychology 22 (2): 173-94. Köbberling, Veronika, and Peter P. Wakker. 2005. "An index of loss aversion." Journal of Economic Theory 122(1): 119-31. Köszegi, Botond, and Matthew Rabin. 2006. "A Model of Reference-Dependent Preferences." Quar terly Journal of Economics 121 (4): 1133-65. Lee, David S., and Thomas Lemieux. 2010. "Regression Discontinuity Designs in Economics." Journal of Economic Literature 48 (2): 281-355. List, John A. 2003. "Does Market Experience Eliminate Market Anomalies?" Quarterly Journal of Economics 118 (1): 41-71. List, John A. 2004. "Neoclassical Theory Versus Prospect Theory: Evidence from a Marketplace." Econometrica 72 (2): 615-25. Nordblom, Katarina, and Jovan Zantac. 2012. "Endogenous Norm Formation Over the Life Cycle: The Case of Tax Morale." Economic Analysis and Policy 42 (2): 153-70. Persson, Annika. 2003. Beslut under risk och osäkerhet. Kan prospect theory tillföra nâgot i riskvärde ringen? Skatteekonomiska meddelanden Nr 33. Stockholm: Riksskatteverket Pope, Devin G., and Maurice E. Schweitzer. 2011. "Is Tiger Woods Loss Averse? Persistent Bias in the Face of Experience, Competition, and High Stakes." American Economic Review 101 (1): 129-57. Rees-Jones, Alex. 2014. "Loss Aversion Motivates Tax Sheltering: Evidence from U.S. Tax Returns." http://dx.doi.org/10.2139/ssrn.2330980. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms 164 AMERICAN ECONOMIC JOURNAL: ECONOMIC POUCY NOVEMBER 2015 Riksskatteverket (RSV). 2001. Om gratislotter och preventiv effect: skattskyldigas avdrag för övriga kostnader under inkomst av tjänst oc troll av detta avdrag. Stockholm: Ministry of Finance. Robben, Henry S. J., Paul Webley, Henk Elffers, and Dick J. Hessing. tunity and tax evasion: An experimental approach." Journal of Econ tion 14 (3): 353-61. Schepanski, A., and T. Shearer. 1995. "A Prospect Theory Account of Phenomenon." Organizational Behavior and Human Decision Proce Schmidt, Ulrich, and Stefan TVaub. 2002. "An Experimental Test of Lo and Uncertainty 25 (3): 233-49. Slemrod, Joel, Charles Christian, Rebecca London, and Jonathan A drome." Economic Inquiry 35 (4): 695-709. Stock, James H., and Motohiro Yogo. 2005. "Testing for Weak Instrum In Identification and Inference for Econometric Models: A Festschrift berg, edited by Donald W. K. Andrews and James H. Stock, 80-108. versity Press. Tversky, Amos, and Daniel Kahneman. 1991. "Loss Aversion in Riskless Choice: A Reference Dependent Model." Quarterly Journal of Economics 106 (4): 1039-61. Tversky, Amos, and Daniel Kahneman. 1992. "Advances in Prospect Theory: Cumulative Representa tion of Uncertainty." Journal of Risk and Uncertainty 5 (4): 297-323. Yaniv, Gideon. 1999. "Tax Compliance and Advance Tax Payments: A Prospect Theory Analysis." National Tax Journal 52 (4): 753-64. This content downloaded from 93.180.40.214 on Sun, 27 Oct 2019 18:36:34 UTC All use subject to https://about.jstor.org/terms