Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2011:17: Loss evasion and tax aversion

Per Engström (), Katarina Nordblom (), Henry Ohlsson () and Annika Persson
Additional contact information
Per Engström: Department of Economics, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Katarina Nordblom: Department of Economics, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Henry Ohlsson: Department of Economics, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Annika Persson: The Swedish Tax Agency

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

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

JEL-codes: C21; C26; D03; H24; H26

43 pages, November 29, 2011

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