Abstract
According to a hypothesis derived from prospect theory, the cognitive bias of loss aversion would make voters more likely to punish the governing majority if taxes are increased faster than the growth of the economy, i.e. if they are worse off in absolute terms. This hypothesis was examined using panel data regressions on data from a new and extensive database over Swedish municipal elections, and tax rates, from 1976 to 2002. It was found that a governing majority loses on average 2.5 percentage points of voter support if such tax hikes take place. At the same time, the unemployment rate, the inflation rate, the tax rate or smaller tax hikes, did not have any significant impact on voter behavior. This lends support to the assumptions that small tax hikes are "free" in terms of voter support and might explain why the high-tax welfare state has been possible and provides an example of an area where insights from Economic Psychology supplement traditional Public Choice theory.