Innovative Ways to Increase Tax Compliance

Both norm-based and public-good messages increased the likelihood of individuals paying their taxes due...

Governments lose billions of dollars in tax revenue each year simply because prospective taxpayers are late in making their payments. Finding ways to accelerate tax payments is the focus of The Behavioralist as Tax Collector: Using Natural Field Experiments to Enhance Tax Compliance (NBER Working Paper No. 20007), by Michael Hallsworth, John List, Robert Metcalfe, and Ivo Vlaev.

The two main reasons for failing to pay taxes on time appear to be a lack of ready cash and mere procrastination. In the United Kingdom, the tax collectors' response to tardiness is to send messages to taxpayers reminding them of their obligations. By conducting two experiments with tax reminders issued to more than 200,000 individuals by Her Majesty’s Revenue and Customs (HMRC) office, the researchers discover that the effectiveness of such letters depends on their wording and the messages they deliver.

The authors' first experiment focuses on taxpayers who had declared their taxable income but had not yet paid what they owed. The researchers randomized three norm-based messages and two public-good messages across 100,000 taxpayers. The norm-based messages included: 1, "Nine out of ten people pay their tax on time," (invoking a basic norm); 2, "Nine out of ten people in the U.K. pay their tax on time," (invoking a country norm); and 3, "Nine out of ten people in the U.K. pay their tax on time. You are currently in the very small minority of people who have not paid us yet," (invoking a minority norm). The public-good messages included: 4, "Paying tax means we all gain from vital public services like the National Health Service (NHS), roads, and schools," (emphasizing the gain from paying taxes); and 5, "Not paying tax means we all lose out on vital public services like the NHS, roads, and schools," (emphasizing the loss from not paying taxes).

Both norm-based and public-good messages increased the likelihood of individuals paying their taxes due, with large differences observed within the various norm-based messages. The basic-norm statement raised the tax payment rate by 1.3 percent, and the country-norm statement by 2.1 percent, within 23 days of communication. The minority-norm statement had an even larger effect, raising the number of taxpayers making payments by 5.1 percent. Both public-good messages, which relied on gain and loss framing, raised tax payments by 1.6 percent.

The second experiment, involving 119,527 U.K. taxpayers, explored the effect of descriptive norms (describing what others do) relative to injunctive norms (describing what others think should be done). In the latter case, the researchers used messages that either stated that paying taxes was the right thing to do, or that most people thought that paying taxes was the right thing to do. Descriptive norms had a significantly larger effect on payments than injunctive norms. The authors estimate that as a result of their experimental intervention, HMRC collected £9 million more over a 23-day period than they would have otherwise.

-- Matt Nesvisky