One of the greatest headaches of tax authorities is simply to get people to pay their taxes, preferably on time. People tend to view taxes as a punishment, instead of them funding public services. Benjamin Franklin is credited to have said “Nothing is certain except for death and taxes”, yet some still try to avoid the latter and become free-riders.
Recently, a growing number of experiments set out to identify the nudges that could potentially be effective in increasing tax compliance, essentially simplification, social norms, moral suasion and threats.
What, according to empirical evidence, actually works? What would be the ideal combination of strategies? Well, a specialized UK government-ordered group called the Behavioural Insights Team (BIT) organized an interesting large-scale experiment to see which method(s) is most effective.
In 2014-2015, in some London boroughs with a high ethnic and socio-economic mix, they sent letters to council tax delinquent households, but varied the format and messages within groups. First, the control group received a simple standard letter explaining that they needed to pay their taxes. Then the second group received a letter that also included a social-normative message: “9 out of 10 people in your area pay their tax on time”. This was to test the hypothesis that pressure to conform to social norms would nudge tax delinquents through embarrassment and fear of visibility. The third group receives a “simplified” bill with the only key information clearly given in short bullet points, cutting through any inaccessible financial jargon. The last group received a simplified bill that also contained the social-normative massage.
The results of this experiment were quite interesting: only the simplification led to increased tax compliance compared to the control group (by 15 percentage points). In fact, the social message didn’t seem to provide any sort of nudge; when paired with the simplified message, it did not perform better than the simplified message alone. It seems that some tax delinquents simply did not understand how to comply. Those that knew how to pay the tax but previously had opted out of doing so were unmoved by the messages. It has been proven though other studies that simplification, especially when dealing with traditionally “complex” professional lingo (such as tax bills, welfare benefits instructions, legal correspondence, etc..) is very effective in communicating what was previously an inaccessible message to some. More interestingly, the results were the same for all levels of socio-economic status. Even in the higher levels, which are believed to be more responsive to shame and avoid such bad press, did not respond differently from the rest.
In Switzerland, a study sent messages such as “Paying your taxes is the right thing to do” to identify if moral suasion was an effective tax-paying tool. However, this was proved to have no effects on the amount of taxes collected. What actually works is using credible threats. The BIT tried to increase the collection of fines by sending messages to late-payers personalized with their names and the amount owed, which increased the number of people paying them back by 30%. The presence of the name is a threat, since the individual knows he can easily be found again by fiscal authorities and feels tracked.
This pattern comes back again and again in many different studies, not all directly connected to tax compliance. In the case of paying for TV license-fees, a study in Austria showed that reminders containing threats were much more effective than social-normative ones (“94% of citizens have registered) or moral suasions (“Those who do not conscientiously register do not only violate the law, but also harm all honest households. Hence, registering is also a matter of fairness”).
People who don’t pay taxes fall into two categories. First, there are those who simply did not understand how to; in this case, authorities should simplify the message for greater effectiveness. In the second case, they are confronted to individuals that resist paying them and are immune to nudges that work for socially perceived “moral” aims (protecting the environment for example). Tax compliance can only be wheedled out though credible threats. Social pressures to conform and moral questions simply cannot make tax delinquents budge.
- Mark Egan, Nudge Database v1.2, https://www.stir.ac.uk/media/stirling/services/faculties/social-sciences/research/documents/Nudge-Database-1.2.pdf
- John P. and Blume T., How best to nudge taxpayers? The impact of message simplification and descriptive social norms on payment rates in a central London local authority (2018), Journal of Public Behavioral Administration, https://journal-bpa.org/index.php/jbpa/article/download/10/3
- Andy Lymer, Nudging taxpayer behaviour (2018), Tax Adviser Magazine, https://www.taxadvisermagazine.com/article/nudging-taxpayer-behaviour
- Carlos Scartascini, Behavioral Economics for Better Public Policies (2016), https://blogs.iadb.org/ideas-matter/en/behavioral-economics-better-public-policies/