Framing And Loss Aversion In Tax Reporting Behavior

This paper investigates the presence of framing effects and loss aversion in tax reporting behavior of wage earners using a balanced panel of German income tax return data. Reference dependence and loss aversion suggest that individuals in a perceived loss situation attribute higher value to a given amount of positive change in outcome than individuals in a perceived gain situation do. Applied to tax reporting behavior, taxpayers who perceive their tax situation as unfavorable compared to a given reference point are expected to make greater effort or accept higher costs to prevent or reduce that perceived loss than taxpayers perceiving themselves to be in a favorable situation. Greater effort can in turn be associated with higher reporting aggressiveness. We identify a potential reference point in taxpayers' previous year's outcome and examine whether taxpayers claim higher additional tax deductions in a loss situation than in a gain situation. We use a difference-in-difference approach with a one-on-one matching strategy to analyze reporting behavior. We find that taxpayers in a loss situation claim higher income-related deductions than taxpayers in a gain situation.

This paper presents evidence that loss aversion affects taxpayers as they file their annual tax returns. I model the decisions of a loss-averse tax filer who may use tax shelters to manipulate the "balance due" exchanged with the IRS. I use this model to derive distinguishing predictions of loss aversion which facilitate its identification and quantification in the field. Under loss framing, the discretely steeper marginal utility of a dollar motivates greater pursuit of shelters. These motives imply that the post-sheltering distribution of balance due will exhibit a structural shift in the loss domain, due to discretely higher sheltering in this region. Furthermore, the discontinuity in marginal incentives generates excess mass, or "bunching," at the gain/loss threshold. Using the 1979-1990 IRS Panel of Individual Returns, I document the predicted bunching and shifting in the distribution of balance due, and examine the causes and correlates of these features. The observed distribution is consistent with the framing of tax payments as losses and tax refunds as gains, and is difficult to rationalize with plausible alternative theories. Using two complementary structural approaches -- identified from the bunching and shifting predictions, respectively -- I estimate substantial potential policy impact of this psychological bias. These results have direct implications for tax policy and public finance.

Tax evasion costs governments worldwide trillions of U.S. dollars. Thus, a comprehensive understanding of tax evasion behavior is needed to ensure that tax evasion is combatted effectively. Using different controlled and incentivized experiments, we analyze whether taxpayers are more willing to evade taxes by underreporting positive income (e.g., business or nonbusiness income) than by overdeducting negative income (e.g., deductions, credits, or losses). We robustly observe an asymmetric tax evasion behavior. Specifically, subjects are less compliant in case of positive income. We argue that this result can be explained by an asymmetric evaluation of tax payments and tax refunds in accordance with prospect theory and the income tax withholding phenomenon. However, in an experimental environment in which the interaction of positive and negative income reporting is made very saliently and in which we consequently expect that subjects decide on both tax evasion decisions jointly, the effect vanishes. We therefore provide evidence that 1) tax evasion behavior is asymmetrically in case of positive and negative income reporting and that 2) the salience of income interaction plays an important role in tax evasion decisions.

This book explores tax evasion through an extensive psychological approach, surveys and official records to simulate real-world cases.

This book presents the definitive exposition of 'prospect theory', a compelling alternative to the classical utility theory of choice. Building on the 1982 volume, Judgement Under Uncertainty, this book brings together seminal papers on prospect theory from economists, decision theorists, and psychologists, including the work of the late Amos Tversky, whose contributions are collected here for the first time. While remaining within a rational choice framework, prospect theory delivers more accurate, empirically verified predictions in key test cases, as well as helping to explain many complex, real-world puzzles. In this volume, it is brought to bear on phenomena as diverse as the principles of legal compensation, the equity premium puzzle in financial markets, and the number of hours that New York cab drivers choose to drive on rainy days. Theoretically elegant and empirically robust, this volume shows how prospect theory has matured into a new science of decision making.

Unlocking what drives tax morale – the intrinsic willingness to pay tax – can greatly assist governments in the design of tax policies and their administration, particularly in developing countries where compliance rates are low. This report builds on previous OECD research to identify some of the key socio-economic and institutional drivers of tax morale across developing countries, and seeks to test for evidence of the social contract by examining the impact of public services on tax morale. It also uses new data on tax certainty as an entry point to explore tax morale in businesses, where existing research is very limited. Finally, the report identifies a range of factors related to the tax system that may affect business decision making, how they vary across regions, and suggests some areas for future research. Overall, the report provides a range of suggestions for further work, and how tax morale considerations can be integrated into holistic tax compliance strategies.

Winner of the Nobel Prize in Economics Get ready to change the way you think about economics. Nobel laureate Richard H. Thaler has spent his career studying the radical notion that the central agents in the economy are humans—predictable, error-prone individuals. Misbehaving is his arresting, frequently hilarious account of the struggle to bring an academic discipline back down to earth—and change the way we think about economics, ourselves, and our world. Traditional economics assumes rational actors. Early in his research, Thaler realized these Spock-like automatons were nothing like real people. Whether buying a clock radio, selling basketball tickets, or applying for a mortgage, we all succumb to biases and make decisions that deviate from the standards of rationality assumed by economists. In other words, we misbehave. More importantly, our misbehavior has serious consequences. Dismissed at first by economists as an amusing sideshow, the study of human miscalculations and their effects on markets now drives efforts to make better decisions in our lives, our businesses, and our governments. Coupling recent discoveries in human psychology with a practical understanding of incentives and market behavior, Thaler enlightens readers about how to make smarter decisions in an increasingly mystifying world. He reveals how behavioral economic analysis opens up new ways to look at everything from household finance to assigning faculty offices in a new building, to TV game shows, the NFL draft, and businesses like Uber. Laced with antic stories of Thaler’s spirited battles with the bastions of traditional economic thinking, Misbehaving is a singular look into profound human foibles. When economics meets psychology, the implications for individuals, managers, and policy makers are both profound and entertaining. Shortlisted for the Financial Times & McKinsey Business Book of the Year Award

Classical and behavioral finance are often seen as being at odds, but the idea of “popularity” has been introduced as a way of reconciling the two approaches. Investors like or dislike various characteristics of securities for rational reasons (as in classical finance) or irrational reasons (as in behavioral finance), which makes the assets popular or unpopular. In the capital markets, popular (unpopular) securities trade at prices that are higher (lower) than they would be otherwise; hence, the shares may provide lower (higher) expected returns.This book builds on this idea and expands it in two major ways. First, it introduces a rigorous asset pricing model, the popularity asset pricing model (PAPM), which adds investor preferences for security characteristics other than the risk and expected return that are part of the capital asset pricing model. A major conclusion of the PAPM is that the expected return of any security is a linear function of not only its systematic risk (beta) but also of all security characteristics that investors care about. The other major contribution of the book is new empirical work that, while confirming the well-known premiums (such as size, value, and liquidity) in a popularity context, supports the popularity hypothesis on the basis of portfolios of stocks based on such characteristics as brand value, sustainable competitive advantage, and reputation. Popularity unifies the factors that affect price in classical finance with those that drive price in behavioral finance, thus creating a unifying theory or bridge between classical and behavioral finance.

This book features the main papers of Günter Schmölders (1903-1991), a pioneer in economic psychology, for the first time in English. Schmölders' research on 'fiscal psychology' is of particular and lasting interest, impacting greatly on continental economics.