Loss-Averse Tax Manipulation and Tax-Preferred Savings

Derek Messacar
Working paper #8
Retirement and Savings Institute – February 2022

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 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.