It’s the end of the tax year, so in the spirit of the season, we’ve looked into how nudges have been used to improve tax compliance around the world. Taxes aren’t typically the most exciting subject, and so it’s easy for people to overlook them due to the formal language used and the complexities involved. The problem is that they’re incredibly important, and not keeping on top of your taxes can land you in some pretty deep water.
Here’s how some countries have overcome the snooze factor to nudge people to pay on time and in the right amounts.
Incentivising compliance with a lottery
For decades, Italy’s economy has had a tax compliance problem, and to combat it, they introduced a new scheme at the start of 2020; people who asked for receipts in any shop would automatically be included in a lottery. The lottery sees seven people win €5000 each week, with a top price of €5million included. The cash prizes work as an incentive to make sure transactions are properly recorded. The lottery scheme runs parallel to another incentive where shoppers can get up to 10% cashback on what they spend until the end of the year, up to a total of €150, if they pay with their debit or credit card, this again makes it easier to record taxable spending.
Italy has followed in several countries’ footsteps with this approach. China, the Czech Republic, Portugal and some states in Brazil have also turned receipts into lottery tickets to persuade shoppers to ensure all their purchases go on the books – proving this nudge an effective way to increase tax revenue without increasing rates.
Filing on time when given the right tools
In Ontario, Canada, employers pay an Employer Health Tax (EHT) each year - a payroll tax on health services provided to both current and former employees. In 2014, many small businesses filed their EHT returns beyond the deadline, with more than 7,000 employers filing late that year. Recognising that small businesses were struggling to comply, the government of Ontario turned to behavioural science to help.
They tested new messaging focused on employers’ ‘implementation intentions’ by helping people accomplish a specific goal by detailing ‘how, when and where’. The letters focused on how to file the EHT return, when it needed to be done by, and where it could be done, directing them to websites and mailing addresses.
Initial results found that those who received the amended letter increased their filings by 13% compared to those who received the original – a significant boost to Ontario’s business tax compliance.
Using social norms to rally good tax behaviour
Back in 2015, the British government looked to fix a long-standing issue – people not paying tax on time. By adding one sentence to letters in certain headline areas, HM Treasury leveraged social norms to encourage more people to ‘be like people who do the right thing’. The headline read, ‘The great majority of people in your local area pay their tax on time. Most people with a debt like yours have paid it by now’.
Whilst we all like the idea of being individuals and different to others, we’re all inherently designed to want to fit in with the crowd. People tend to conform to behaviours that are common amongst other people, which is why the line was so effective; on-time payments rose by more than 15% in the test, and if applied nationwide, the estimation was that on-time tax payments would rise by $240 million (over £180 million).
These are just a few examples of how nudges have helped make important-but-boring topics more bearable, leading to better tax behaviour. Have you seen any more examples? Let us know.
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