Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/226308 
Year of Publication: 
2020
Series/Report no.: 
CESifo Working Paper No. 8606
Publisher: 
Center for Economic Studies and Ifo Institute (CESifo), Munich
Abstract: 
The evidence shows source-dependent entitlement to income sources and individuals are reluctant to part with income they feel more entitled to, e.g., earned labor income. Taxpayers may also be more reluctant to part with tax payments (evade more) from income sources they feel more entitled to- a form of mental accounting. We embed two main hypotheses within a rigorous theoretical model based on prospect theory. From incomes sources they feel more entitled to, taxpayers experience (i) greater loss aversion from paying taxes, and (ii) lower moral costs of evasion. We confirm the predictions of our model through MTurk experiments. Evasion is increasing in the tax rate and decreasing in the audit penalty. Moral costs influence taxpayers' decisions. Loss aversion, measured "directly" for the first time for each individual in an evasion experiment, reduces evasion, as predicted by our theory. Loss aversion, risk aversion, and their interaction, are critical determinants of evasion.
Subjects: 
mental accounting
tax evasion
loss aversion
morality
prospect theory
risk-aversion
JEL: 
C91
C92
D82
D91
G21
Document Type: 
Working Paper
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