Most Americans comply with the tax laws, but every year many do not. The result is the “tax gap” – the amount of revenue that the government loses because people are cheating. In one recent year, for example, the tax gap was $450 billion (R4.7 trillion).
That’s a lot of money. More than 10 times the budget of the State Department.
What can be done to increase compliance? Remarkably, a letter to delinquent taxpayers – based on the findings of behavioural science – can have large effects. And the central lesson is simple: when tax delinquents are told that most people pay theirs on time, they are more likely to pay up.
It’s a nudge that can work. A new study from the UK confirms this. The lead author is Michael Hallsworth, a doctoral candidate at Imperial College London and an adviser to the UK’s Behavioural Insights Team. In the first of two experiments, Hallsworth and his colleagues sent letters to more than 100 000 citizens in 2011.
All the letters noted that the recipients had not yet made correct tax payments, but there were different versions of what followed that reminder. The first said: “Nine out of 10 people pay their taxes on time.” The second said: “Nine out of 10 people in the UK pay their taxes on time.” The third said: “Nine out of 10 people in the UK pay their taxes on time. You are currently in the very small minority of people who have not paid us yet.” The fourth did not refer to social norms, but added this sentence: “Paying tax means we all gain from vital public services” such as the National Health Service, roads and schools.
The letters were effective. Overall, those who received one of these letters were nearly four times more likely to pay their tax bill than those who did not. The most effective letter was the third: in less than a month, it produced $3.18 million in additional revenue. If that letter had been used across the entire sample, it would have produced an additional $18.9m.
Hallsworth’s second experiment involved nearly 120 000 taxpayers and more than a dozen different letters. Some referred to a general norm about existing practices, known as a descriptive norm: “The great majority of people in the UK pay their tax on time.” Others were more specific: “The great majority of people in your local area pay their tax on time” or “Most people with a debt like yours have paid it by now.”
Some letters referred to what people in the UK think taxpayers should do (an injunctive norm): “The great majority of people agree that everyone in the UK should pay their tax on time.” Some emphasised that people could save money by paying now: “We are charging you interest.”
With this experiment, Hallsworth’s team replicated their earlier finding: “norm” messages have a large impact. They also found that descriptive norms have a bigger effect than injunctive norms. Finally, highlighting a penalty that would increase over time made it more likely that people would pay. Within a period of about three weeks, the letters were able to generate about $15.24m in additional tax revenue. Note that letters of this sort are essentially cost-free to produce and send, so the benefits of the intervention were easily justified.
How can these results be explained? The best answer is that people care whether they are acting morally. Their willingness to pay taxes, or to stop procrastinating, depends on whether the moral question is salient to them – on whether they are incurring “moral costs.”
If the goal is to promote compliance, it helps if people learn that their fellow citizens think that they should. It helps even more if people learn that those who have not paid are a small minority of cheaters.
It is not yet know when and whether the study will generalise to different nations, but it fits with others that have found that people are less likely to engage in undesirable behaviour when they learn that it’s out of line with what others do.
Some tax authorities try to close the tax gap by threatening to punish delinquents, but threats can create a political backlash, and enforcement can be expensive.
There are no panaceas, but a gentler approach can pay big dividends. The message – a small nudge – should be: Pay your taxes, because the overwhelming majority of your fellow citizens are paying theirs.