Salience and Loss Aversion among Taxpayers

Abstract: In this paper, I evaluate whether salience induces loss aversion among taxpayers. Using annual register data from 2013-2017 for taxpayers reporting tradable securities, E-filing taxpayers are shown to exhibit bunching on the surplus side of the zero final tax balance. A corresponding excess mass is not found for paper filers. Considering previous evidence and theoretical predictions, this points in the direction of loss aversion induced by salience in the E-filing service. Further, the E-filing service reduces capital gains of taxpayers by on average 24%. However, this paper cannot clearly identify whether E-filers use manipulation of capital reports to evade taxes. The decrease in capital gains can to a negligible extent be attributed to assistance by the E-filing service in reducing suboptimal choice in the calculation of buying prices, resulting in legal reductions of capital gains.