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Loss-averse tax manipulation and tax-preferred savings

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  • Messacar, Derek

Abstract

Using administrative data from Canada linked to a financial capability survey, I show that tax-deductible savings plans are often used to manipulate final balances owed to the central tax authority during tax season. This finding implies a strong avoidance motive for saving, where tax filers manipulate final balances rather than total tax liabilities, consistent with loss-aversion. The magnitude of this effect is economically significant. For example, each $100 owed increases the likelihood of contributing by about half a percentage point. There is suggestive evidence that the behavior is driven by tax filers with low financial literacy who make disproportionately large contributions in the last 60 days before the annual deadline.

Suggested Citation

  • Messacar, Derek, 2023. "Loss-averse tax manipulation and tax-preferred savings," Journal of Economic Behavior & Organization, Elsevier, vol. 207(C), pages 257-278.
    • Handle: RePEc:eee:jeborg:v:207:y:2023:i:c:p:257-278
    DOI: 10.1016/j.jebo.2023.01.014
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    References listed on IDEAS

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    More about this item

    Keywords

    Loss-aversion; Tax avoidance; Savings; Regression kink design;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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