Framing and loss aversion in tax reporting behavior: Evidence from German income tax return data

Markus Diller and Daniela Kühne

No B-43-20, Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe from University of Passau, Faculty of Business and Economics

Abstract: 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.

Keywords: loss aversion; framing; tax avoidance; nonbusiness tax (search for similar items in EconPapers)
JEL-codes: D91 H24 H26 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cbe, nep-eur, nep-iue, nep-pub and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:upadbr:b4320

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