Applying Behavioral Insights to Tax Compliance: Experimental Evidence from Latvia

Authors

  • Julian C. Jamison Mind, Behavior, and Development Unit (eMBeD), The World Bank; Economics Department, University of Exeter, Exeter, Devon, U.K.
  • Nina Mazar Questrom School of Business, Boston University, Boston, Massachusetts, U.S.
  • Iman Sen Mind, Behavior, and Development Unit (eMBeD), The World Bank, Washington D.C., U.S.

Keywords:

Tax Compliance, Behavioral Economics, Randomized Field Experiments

Abstract

In recent years, tax authorities around the world have started to use behavioral insights to encourage taxpayers to fulfill their obligations. We review and discuss some of the recent empirical literature on tax compliance. In line with recent trends, we report on a field experiment in collaboration with the State Revenue Service of Latvia (SRS) to encourage previously non-compliant individuals, who also have their own business income, to submit their tax declarations on time in 2017. These individuals were pre-emptively sent emails with behaviorally informed messages in order to reach and influence an important target population at a salient moment. Our results indicate that all of the behaviorally-informed messages increased submissions by the submission deadline when compared to a control group. The best performer was a message that specifically framed non-compliant behavior as a deliberate choice and increased timely submissions by 9.4% (4.1 percentage points; p=0.05).

References

Allingham, M. G., and Sandmo, A. (1972). Income tax evasion: A theoretical analysis. Journal of Public Economics, 1(3-4), 323-8. https://doi.org/10.1016/0047-2727(72)90010-2

Alm, J., Jackson, B. R,. and McKee, M. (1992). Deterrence and beyond: Toward a kinder, gentler IRS. In J. Slemrod (Ed.), Why people pay taxes: Tax compliance and enforcement (pp. 311-329). Ann Arbor, MI: The University of Michigan Press.

Alm, J., Cherry, T., Jones, M., & McKee, M. (2010). Taxpayer information assistance services and tax compliance behavior. Journal of Economic Psychology, 31(4), 577-586. https://doi.org/10.1016/j.joep.2010.03.018

Andreoni, J., Erard, B., & Feinstein, J. (1998). Tax compliance. Journal of Economic Literature, 36(2), 818-860.

Arcos Holzinger, L., & Biddle, N. (2016). Behavioural insights of tax compliance: An overview of recent conceptual and empirical approaches (TTPI – Working Paper 8/2016) . Canberra, Australia: Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University.

Ariel, B. (2012). Deterrence and moral persuasion effects on corporate tax compliance: Findings from a randomized controlled trial. Criminology, 50(1), 27-69. https://doi.org/10.1111/j.1745-9125.2011.00256.x

Bazart, C., & Bonein, A. (2014). Reciprocal relationships in tax compliance decisions. Journal of Economic Psychology, 40, 83-102. https://doi.org/10.1016/j.joep.2012.10.002

Bérgolo, M., Ceni, R., Cruces, G., Giaccobasso, M., & Perez-Truglia, R. (2017). Tax audits as scarecrows: Evidence from a large field experiment (NBER Working Paper No. 23631). Cambridge, MA: National Bureau of Economic Research. https://doi.org/10.3386/w23631

Besley, T. J., Jensen, A., & Persson, T. (2015). Norms, enforcement, and tax evasion (CEPR Discussion Paper No. DP10372). London, England: Center for Economic Policy Research.

Bhargava, S., & Manoli, D. (2015). Psychological frictions and the incomplete take-up of social benefits: Evidence from an IRS field experiment. American Economic Review, 105(11), 3489-3529. https://doi.org/10.1257/aer.20121493

Bicchieri C., Lindemans, J. W., & Jiang, T. (2014). A structured approach to the diagnostic of collective practices. Frontiers in Psychology, 5. https://doi.org/10.3389/fpsyg.2014.01418

Blackwell, C. (2007, December). A meta‐analysis of tax compliance experiments (International Studies Program Working Paper 07‐24) Atlanta, GA: Andrew Young School of Policy Studies, Georgia State University.

Blumenthal, M., Christian, C. W., & Slemrod, J. (2001). Do normative appeals affect tax compliance? Evidence from a controlled experiment in Minnesota. National Tax Journal, 54(1). https://doi.org/10.17310/ntj.2001.1.06

Bott, K. M., Cappelen, A.W., Sørensen, E. Ø., & Tungodden, B. (2017). You've got mail: A randomised field experiment on tax evasion (NHH Dept. of Economics Discussion Paper No. SAM 10 2017). Bergen, Norway: NHH Norwegian School of Economics.

Brockmeyer, A., Hernandez, M., Kettle, S., & Smith, S. (2016). Casting the tax net wider: Experimental evidence from Costa Rica (Policy Research Working Paper No. 7850). Washington D.C.: World Bank.

The Cabinet Office Behavioural Insights Team. (2012). Applying behavioural insights to reduce fraud, error and debt. London, England: Cabinet Office Behavioural Insights Team.

Carrillo, P. E., Castro, E., & Scartascini, C. (2017). Do rewards work? Evidence from the randomization of public works (IDB Working Paper Series No. IDP-WB-794). n,p.: Inter-American Development Bank.

Carrillo, P., Pomeranz, D., & Singhal, M. (2017). Dodging the taxman: Firm misreporting and limits to tax enforcement. American Economic Journal: Applied Economics 9(2), 144-164. https://doi.org/10.1257/app.20140495

Castro, L., & Scartascini, C. (2015). Tax compliance and enforcement in the pampas evidence from a field experiment. Journal of Economic Behavior & Organization, 116, 65-82. https://doi.org/10.1016/j.jebo.2015.04.002

Charness, G., & Rabin, M. (2002). Understanding social preferences with simple tests. The Quarterly Journal of Economics, 117(3), 817-869. https://doi.org/10.1162/003355302760193904

Chetty R., Mobarak, M., & Singhal, M. (2014). Increasing tax compliance through social recognition (IGC Policy Brief 31101).

Coleman, S. (1996). The Minnesota income tax compliance experiment: State tax results (MPRA Paper No. 4827). Munich, Germany: University of Munich.

Croson, R., & Gneezy, U. (2009). Gender differences in preferences. Journal of Economic Literature, 47(2), 448-474. https://doi.org/10.1257/jel.47.2.448

Cummings, R. G., Martinez-Vazquez, J., McKee, M., & Torgler, B. (2009). Tax morale affects tax compliance: Evidence from surveys and an artefactual field experiment. Journal of Economic Behavior & Organization, 70(3), 447-457. https://doi.org/10.1016/j.jebo.2008.02.010

Dai, Z., Hogarth, R. M., & Villeval, M. C. (2015). Ambiguity on audits and cooperation in a public goods game. European Economic Review, 74(C), 146-162. https://doi.org/10.1016/j.euroecorev.2014.11.009

Del Carpio, L. (2014). Are the neighbors cheating? Evidence from a social norm experiment on property taxes in Peru. Unpublished manuscript. https://faculty.insead.edu/lucia-del-carpio/documents/Are_the_neighbors_cheating_Apr2014.pdf

DeScioli, P., Asao, K., & Kurzban, R. (2012). Omissions and byproducts across moral domains. PLOS ONE, 7(10), e46963. https://doi.org/10.1371/journal.pone.0046963

Dorrenberg, P., & Schmitz, J. (2017). Tax compliance and information provision - A field experiment with small firms. Journal of Behavioral Economics for Policy, 1(1), 47-54.

Dunning, T., Monestier, F., Piñeiro, R., Rosenblatt, F. & Tuñón, G. (2016). Is paying taxes habit forming? Experimental evidence from Uruguay. Unpublished paper.

Dwenger, N., Kleven, H., Rasul, I., & Rincke, J. (2016). Extrinsic and intrinsic motivations for tax compliance: Evidence from a field experiment in Germany. American Economic Journal: Economic Policy, 8(3), 203-232. https://doi.org/10.1257/pol.20150083

Fehr, E., & Falk, A. (2002). Psychological foundations of incentives, European Economic Review, 46(4-5), 687-724. https://doi.org/10.1016/S0014-2921(01)00208-2

Fehr, E., & Gächter, S. (2000) .Cooperation and punishment in public goods experiments. American Economic Review, 90 (4), 980-994. https://doi.org/10.1257/aer.90.4.980

Fellner, G., Sausgruber, R., & Traxler, C. (2013). Testing enforcement strategies in the field: Threat, moral appeal and social information. Journal of the European Economic Association, 11(3), 634-660. https://doi.org/10.1111/jeea.12013

Frey, B. S., & Torgler, B. (2007). Tax morale and conditional cooperation. Journal of Comparative Economics, 35(1), 136-159. https://doi.org/10.1016/j.jce.2006.10.006

Gangl, K., Torgler, B., Kirchler, E., & Hofmann, E. (2014). Effects of supervision on tax compliance: Evidence from a field experiment in Austria (QuBE Working Papers #019), Brisbane, Australia: Queensland Behavioural Economics Group, Queensland University of Technology.

Guyton, J., Langetieg, P., Manoli, D., Payne, M., Schafer, B., & Sebastiani, M. (2017). Reminders and recidivism: Using administrative data to characterize nonfilers and conduct EITC outreach. American Economic Review, 107(5), 471-475. https://doi.org/10.1257/aer.p20171062

Hallsworth, M. (2014). The use of field experiments to increase tax compliance. Oxford Review of Economic Policy, 30(4), 658-679. https://doi.org/10.1093/oxrep/gru034

Hallsworth, M., List, J. A.., Metcalfe, R. D., & Vlaev, I. (2017) The behavioralist as tax collector: Using natural field experiments to enhance tax compliance. Journal of Public Economics, 148, 14-31. https://doi.org/10.1016/j.jpubeco.2017.02.003

Harju, J., Kosonen, T., & Ropponen, O. (2014). Do honest hairdressers get a haircut? On tax rate and tax evasion (VATT Working Paper). Helsinki, Finland: Government Institute for Economic Research (VATT).

Hashimzade, N., Myles, G. D., & Tran‐Nam, B. (2013). Applications of behavioural economics to tax evasion. Journal of Economic Surveys, 27(5), 941-977. https://doi.org/10.1111/j.1467-6419.2012.00733.x

Hasseldine J., Hite, P., James, S., & Toumi, M. (2007). Persuasive communications: Tax compliance enforcement strategies for sole proprietors. Contemporary Accounting Research, 24(1), 171-194. https://doi.org/10.1506/P207-004L-4205-7NX0

Hazans, M. (2011). Informal workers across Europe: Evidence from 30 European countries(Policy Research Working Paper No. WPS 5912). Washington, D.C.: The World Bank.

Hernandez, M., Jamison, J., Korczyc, E., Mazar, N., & Sormani, R. (2017). Applying behavioral insights to improve tax collection: Experimental evidence from Poland. Washington, D.C.: The World Bank.

John, P., & Blume, T. (2018). How best to nudge taxpayers? The impact of message simplification and descriptive social norms on payment rates in a central London local authority. Journal of Behavioral Public Administration, 1(1). https://doi.org/10.30636/jbpa.11.10

Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-292. https://doi.org/10.2307/1914185

Karlan, D., McConnell, M., Mullainathan, S., & Zinman, J. (2016). Getting to the top of mind: How reminders increase saving. Management Science, 62(12), 3393-3411. https://doi.org/10.1287/mnsc.2015.2296

Kettle, S., Hernandez, M., Ruda, S., & Sanders, M. (2016). Behavioral interventions in tax compliance: Evidence from Guatemala (Policy Research Working Paper No. WPS 7690). Washington, D.C.: The World Bank.

Kirchler, E. (2007). The Economic psychology of tax behaviour. New York, NY: Cambridge University Press.

Kleven, H. J., Knudsen, M. B., Kreiner, C. T., Pedersen, S., & Saez, E. (2011). Unwilling or unable to cheat? Evidence from a tax audit experiment in Denmark. Econometrica, 79(3), 651-692. https://doi.org/10.3982/ECTA9113

Koessler, A., Torgler, B., Feld, L. P., & Frey, B. S. (2016). Commitment to pay taxes: A field experiment on the importance of promise (TTPI Working Paper No. 10/2016). Canberra, Australia: Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University.

Lamberton, C. P., De Neve, J. E., & Norton, M. I. (2014, April). Eliciting taxpayer preferences increases tax compliance. https://doi.org/10.2139/ssrn.2365751

Laske, K., Saccardo, S., & Gneezy, U. (2018). Do fines deter unethical behavior? The effect of systematically varying the size and probability of punishment. https://doi.org/10.2139/ssrn.3157387

Luttmer, E. F. P., & Singhal, M. (2014). Tax morale. Journal of Economic Perspectives, 28(4), 149-168. https://doi.org/10.1257/jep.28.4.149

Mascagni, G. (2018). From the lab to the field: A review of tax experiments. Journal of Economic Surveys, 32(2), 273-301. https://doi.org/10.1111/joes.12201

Mascagni, G., Nell, C., & Monkam, N. (2017). One size does not fit all: A field experiment on the drivers of tax compliance and delivery methods in Rwanda (ICTD Working Paper 58). Brighton, England: The International Centre for Tax and Development at the Institute of Development Studies.

Mazar, N., & Hawkins, S. A. (2015). Choice architecture in conflicts of interest: Defaults as physical and psychological barriers to (dis)honesty. Journal of Experimental Social Psychology, 59(July 2015), 113-117. https://doi.org/10.1016/j.jesp.2015.04.004

Naritomi, J. (2016). Consumers as tax auditors. Unpublished working paper.

Ortega, D., & Scartascini, C. (2015). Don't blame the messenger: A field experiment on delivery methods for increasing tax compliance (IDB Working Paper Series No. IDB-WP-627). https://doi.org/10.2139/ssrn.2729732

Perez-Truglia, R., & Troiano, U. (2018) Shaming tax delinquents (NBER Working Paper 21264). https://doi.org/10.3386/w21264

Pomeranz, D. (2015). No taxation without information: Deterrence and self-enforcement in the value added tax. American Economic Review, 105(8), 2539-2569. https://doi.org/10.1257/aer.20130393

Pomeranz, D. D, & Vila-Belda, J. (2019). Taking state-capacity research to the field: Insights from collaborations with tax authorities (CEPR Discussion Paper 13688). London, England: CEPR Centre for Economic Policy Research.

Ritov, I., & Baron, J. (1990). Reluctance to vaccinate: Omission bias and ambiguity. Journal of Behavioral Decision Making, 3(4), 263-277. https://doi.org/10.1002/bdm.3960030404

Robitaille, N., House, J., & Mazar, N. (2020). Effectiveness of planning prompts on organizations’ likelihood to file their overdue taxes: A multi-wave field experiment (Rotman School of Management Working Paper No. 2997993). https://doi.org/10.2139/ssrn.2997993

Slemrod, J. (2017). Tax compliance and enforcement: An overview of new research and its policy implications. In A. J. Auerbach & K. Smetters (Eds.), The economics of tax policy (pp. 81-102). New York, NY: Oxford University Press.

Slemrod, J., Blumenthal, M., & Christian, C. (2001). Taxpayer response to an increased probability of audit: Evidence from a controlled experiment in Minnesota. Journal of Public Economics, 79(3), 455-483. https://doi.org/10.1016/S0047-2727(99)00107-3

Stango, V., & Zinman, J. (2011). Fuzzy math, disclosure regulation, and market outcomes: Evidence from truth-in-lending reform. The Review of Financial Studies, 24(2), 506-534. https://doi.org/10.1093/rfs/hhq089

Torgler, B. (2004a). Cross‐culture comparison of tax morale and tax compliance: Evidence from Costa Rica and Switzerland. International Journal of Comparative Sociology, 45(1-2), 17-43. https://doi.org/10.1177/0020715204048309

Torgler, B. (2004b). Moral suasion: An alternative tax policy strategy? Evidence from a controlled field experiment in Switzerland. Economics of Governance 5(3), 235-253. https://doi.org/10.1007/s10101-004-0077-7

Weigel, J. L. (2018). Building state and citizen: How tax collection in Congo engenders citizen engagement with the state. Unpublished working paper.

World Bank. (2015). World Development Report 2015: Mind, Society, and Behavior. https://doi.org/10.1596/978-1-4648-0342-0

World Bank. (2017). Latvia Tax Review. Washington D.C.: World Bank.

Volume 6.2 of JOTA - Jamison et al. Cover

Downloads

Published

04-06-2021

How to Cite

Jamison, J. C., Mazar, N., & Sen, I. (2021). Applying Behavioral Insights to Tax Compliance: Experimental Evidence from Latvia. Journal of Tax Administration, 6(2), 6–32. Retrieved from https://journals.docuracy.co.uk/jota/article/view/46

Issue

Vol. 6 No. 2 (2021): General Issue

Section

Articles

License

Copyright (c) 2021 Julian C. Jamison, Nina Mazar, Iman Sen

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Our open access status means that authors retain the copyright of their work. However, all papers published in JOTA are done so under a Creative Commons Attribution 4.0 International  license (CC BY). This means that others can share and/or adapt your work without your permission as long as they follow certain rules, including attributing your work correctly.

You can learn more about this on our Open Access, Licensing, and Copyright Policies page.