Tax administrations (TAs) increasingly use techniques typical of economic psychology to analyze the behaviors of citizens and thus improve tax compliance.

Behavioral economics makes it possible to use tools to reduce psychological biases, which can lead to tax non-compliance, and it can also use information that can change taxpayers’ beliefs and thus encourage voluntary compliance.

Among these tools, the “nudge” techniques that are aimed at encouraging and encouraging correct tax behavior and are based on the “behavioral insights” approach, that is, an approach towards a better understanding of taxpayer behavior.

The purpose of the present blog is to analyze some of these experiences, particularly those related to sending communications to taxpayers to improve compliance, and then share some ideas on the topic.

1- EXPERIENCES OF SOME COUNTRIES.

In Colombia[1], personalized messages were developed that included information about the taxpayer’s debts, payment methods and the cost in terms of interest and other penalties that the taxpayer could incur if he maintained his behavior. The message “Colombia, a commitment we cannot evade” was also included as a moral call to civic responsibility.

Experiments showed that messages sent by personal contact methods tend to be more effective than impersonal ones. While 8 out of 100 people who received a letter paid their debts, the figure doubled in the case of those who received an email. Phone calls increased the success rate to 30 out of 100 people, and personal visits were by far the most successful, with nearly nine out of 10 people deciding to change their behavior and meet their tax obligations.

In Latvia,[2] the impact of sending emails containing various types of messages was measured and found that highlighting non-compliance as a deliberate option was the most effective way to increase the submission of tax returns.

In Poland[3], letters with different messages were sent, such as highlighting social incentives such as public goods and social norms, emphasizing penalties for non-compliance, or emphasizing non-payment of taxes as an intentional option, to defaulting taxpayers.  They found that the messages significantly improved tax compliance in relation to the status quo letter.

In Belgium[4], simplified letters were sent, and the consequences of non-compliance were made explicit, such as fines and tax increases and / or enforcement of controls, which led to higher rates of tax compliance, while moral messages promoting social norms had no impact and sometimes decreased compliance.

In Germany[5], it was also revealed that simplifying tax notification letters and highlighting the possibility of sanctions can increase taxpayer compliance.

In the UK, several experiments were also done on this topic.[6] In one of them, 100,000 letters with 6 different messages were sent. It was concluded that the use of social norms through short messages is effective in pushing people to a behavior.

In another experiment, it was about reducing the costs or inconvenience of filling out forms to pay taxes. At first, the letter was sent and added  to the web page on which the form could be downloaded, thus achieving a response rate of 19 %. The intervention consisted simply of putting a direct link to the download of the form, becoming the response rate of 23%.

The TA of Canada found that in 2014 there were people who contributed more than allowed to a tax-free savings account (because there is a ceiling on the amount to be contributed) and made an intervention to correct this situation. They sent 4 letters, in the first letter he referred to the social norm –most people contribute within the limit -; another group was sent a letter simplifying the message and information; the third message was demanding compliance; finally, the control group received the usual letter. The results show that the behavioral  letters were more effective. 47% of those who received the first two messages withdrew the excess contributed, for the third and fourth messages the percentages are 41 and 38%, respectively.

In Guatemala in 2015, then in Poland and Kosovo between 2016 and 2018, [7]changes were made to the way in which TAs communicate with taxpayers. Instead of sending notifications that only indicated that taxes were due, they sent you different types of communications.

Messages varied by country and recipients. In some letters, the citizens were reminded that most people do pay their taxes.

In others, they appealed to patriotism or mentioned how much the country needed these payments to provide health and safety to its citizens. In Poland, reminders in friendly words and calls for patriotism that worked well in Guatemala and Kosovo had little effect. What worked best were the letters warning about the consequences of non-payment.

In Guatemala, during the first year, taxpayers who received the new communications paid 4 times more in taxes than those who did not. These achievements have been maintained over time. In Poland, tax payments among the nearly 150,000 people who received the new communications increased by 20.8%.

And in Kosovo, the 8,000 taxpayers who had received the reformulated communications paid personal income tax 2 to 4 percentage points higher than those who did not receive these letters.

2- FINAL IDEAS.

In addition to the sending of the letters or communications discussed herein, obviously there are many ways to improve tax compliance and it is clear that the TA must work permanently on reducing the compliance costs that taxpayers must face, and also on the costs of administering the tax system.

Today, the TAs set prevention of fraud as a strategic objective, in addition to the fight against tax fraud.  And this requires the design of a comprehensive assistance strategy that manages to reduce the administrative burdens faced by taxpayers and promote voluntary compliance with tax obligations and, with this, prevent non-compliance.

It is very important to facilitate taxpayers who want to comply by offering comprehensive information and assistance services, covered by qualified personnel, where all areas of the TAs are aimed at this goal to decrease so-called compliance costs.

Among other measures to promote tax compliance, we can mention the simplification of the rules and procedures of management, the provision of tax data, draft declarations, pre-filled or pre-completed returns, the payment facilities and postponements, the management of refunds, the measures of cooperative compliance, as the codes of good practice or forums of companies and professionals, the diffusion of schemas or catalogs of operations, transactions or regimes that decrease a potential tax non-compliance.

The digitalization of the TAs can surely also improve tax compliance, making more efficient both the functions of services and control and above all providing transparency to the relationship with citizens in their different actions, thus providing certainty.

In short, the digital transformation of the TAs must be approached in a holistic way, redefining the processes, orienting the services to the citizen, and, of course, establishing a strategy that combines the citizen-centered approach with a more efficient, interconnected, collaborative model, adapted to the social reality.

I would like to emphasize the importance of studying in each country what are the causes that influence tax non-compliance.

These causes, I understand include not only the causes of evasion[8] but also the causes that motivate the so-called “delinquency”, this is when taxpayers correctly declare their taxes but do not comply with the payment of them.

TAs must also understand the factors that motivate taxpayers to comply (tax morals), so I believe that more research should be done on the issue.

All these communications that we have reviewed are aimed at improving the voluntary compliance of taxpayers, being key to its success the message that is sent, and also the way and time to transmit it.

We share what Pablo Grande Serrano[9] said on this issue regarding the importance of conducting randomized controlled trials to test this type of communication messages before applying them in general.

These tests also help TAs understand how small changes, particularly in the way they communicate with taxpayers, can have significant impacts on individuals’ behavior and therefore on the outcomes they consider important.

In the end, I want to emphasize that there is no single solution or magic to achieve voluntary compliance, however, if it is possible to talk of best practices that have been successful in certain countries, without prejudice to the fact that it is very important that the implementation is done by considering the context of the country concerned.

For this, it is essential to work on a permanent basis to achieve widespread social acceptance of the tax system, since it is very difficult to apply a tax system without its social acceptance.

[1] https://blogs.iadb.org/ideas-que-cuentan/es/la-economia-del-comportamiento-y-como-hacer-que-los-mensajes-funcionen/
[2] https://www.povertyactionlab.org/evaluation/improving-tax-compliance-through-behavioral-messages-latvia
[3] https://www.povertyactionlab.org/evaluation/applying-behavioral-insights-improve-tax-enforcement-poland
[4] https://www.povertyactionlab.org/evaluation/impact-different-messaging-strategies-tax-compliance-belgium
[5] https://www.povertyactionlab.org/evaluation/information-and-incentives-encourage-tax-compliance-germany
[6] Pablo Grande Serrano – international experience in the application of economic psychology to encourage voluntary compliance with tax obligations Tax Administration Review CIAT/AEAT/ IEF (No. 47, January, 2021) / 2021
[7] https://www.bancomundial.org/es/results/2020/06/11/studies-prove-citizens-are-more-likely-to-pay-taxes-if-asked-the-right-way
[8] To enlarge, see Alfredo Collosa: What are the causes of tax evasion? CIAT Blog 25/06/2019
[9] Item Note 6.

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