Gordon Smith, CBE

How behavioral science improves tax compliance

It wasn’t too long ago that most government agencies used a simple strategy to keep citizens compliant with things like paying taxes, appearing for jury duty or maintaining licenses: remind them of the consequences they could incur if they didn’t comply.

The assumption was that people would make rational decisions on cost-benefit grounds and would act out of self-interest. Why wouldn’t they? It’s how we imagined we’d behave ourselves, and it’s how we designed our policies and strategies.

As it turned out, real life isn’t so simple. Even smart people don’t always do the smart thing. We put off taking important actions even when doing so could harm us. Instead of looking at the facts and evaluating them logically, we may instead react instinctively and impulsively.

Recognizing that it’s not enough to simply provide people with information and explanations, revenue and enforcement agencies are increasingly taking a new approach. Slowly, they are understanding that they must engage with the psychologies that shape people’s reactions and behaviors. Taking a page from behavioral science, they are looking at the multitude of interactions they have with constituents—from letters, notices and texts, to call center conversations, online forms and website design.

New insights into what really makes us tick

Behavioral science has shown us that many of our everyday decisions are influenced by factors of which we are not even conscious.

Let’s not feel bad about it; our minds are complex and they have a lot to do! Sometimes our minds respond instinctively to particular triggers, apply biases or take unsolicited mental shortcuts on our behalf. These shortcuts sometimes help keep us out of trouble, but other times they can land us right in the middle of it.

However, just because our decisions aren’t always the product of rational thought, doesn’t mean that they are unpredictable. On the contrary, many of these biases and shortcuts are systematic and highly predictable, which means agencies can take them into account when developing policies, processes and business strategies. They can include the kinds of prompts, nudges and cues that we know will support and increase compliant behavior while removing those that we can now see are likely to encourage inaction or worse.

If you are not already using behavioral insights, you should be

Government agencies worldwide increasingly recognize the importance of behavioral insights and the opportunities it offers to help their citizens make the right decisions. This discipline applies concepts from across behavioral science practices such as psychology, behavioral economies and neuroscience to understand how people process and react to information. Using behavioral insights, organizations can more effectively design policies and citizen interactions with greater knowledge of human behavior in mind. It is not a fad. It’s here to stay.

One of behavioral insights great attractions is that small and seemingly insignificant changes—slight changes in wording of a single sentence—can make a big difference in whether, and how, people react and engage. Single digit percentage improvements in desired outcomes are commonplace. But there are also examples of much more dramatic improvements.

For example, one tax agency I worked with had a series of increasingly insistent letters it sent to people with tax debts who had failed to respond to previous mailings.

After using the same set of letters for some time, the agency added a single sentence to the final message in the sequence, along the lines of, “We think your failure to respond to previous letters has been inadvertent, but if you don’t respond to this one, we will assume you are avoiding us.”

This technique is sometimes called “active choice.” It is potent, but needs to be used selectively and with care, as it is quite aggressive. The result in this case was to double the response rate.

Driving voluntary compliance with behavioral insights

To date, a lot of successful behavioral insights activity in government has been focused on preventing or correcting defaults like overdue tax returns, unpaid taxes, fines and other obligations. But some tax agencies are now also using it pre-emptively to complement their tax audit strategies.

Auditing is an essential element of any tax agency’s compliance toolkit. But audits take time and are often costly and complex. It would be better to try to deter wrongdoing than attempt to find and fix it afterwards, which is not easy. Some agencies are getting good results by using targeted behavioral insights messaging to complement their audit strategies.

Consider the impact of a taxpayer receiving a letter telling them that the revenue agency knows about his or her Swiss bank account. That central message would of course be worded in a non-threatening way, but its point is unmistakable: we know more than you think and are monitoring to make sure that you do the right thing.

This kind of approach has been most effective when coupled with other behavioral insights elements, such as deeper personalization or the use of relevant behavioral norms. A letter to a doctor reminding her that most doctors report income from drug companies, but she has not, tells her that the tax agency has noticed.

These are not allegations of wrongdoing. Messages like these are precautionary. But where there is actual non-compliance, these messages help encourage voluntary correction. They can, of course, be softened or toughened up, according to context.

I’ve just given a very few examples of the kinds of ideas that are globally being put into practice. There are great opportunities everywhere for agencies to test out simple ideas. Start with your own letters and notices. You may not have to look far.

For more ideas on how to get started, see our white paper “Using behavioral sciences to improve government debt collection."

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