How normative messaging increased tax compliance by 15%

Intervention Tax

Abstract

In the United States alone, the cost of unpaid taxes is estimated at $1 trillion a year.3  Contributing factors to this loss include false information filed on tax documents and avoidance of payment. This financial loss is significant and decreases the funding available for public services such as healthcare and education. In the UK, the Behavioural Insights Team (BIT) ran an experiment in the interest of increasing tax compliance. They found that a higher proportion of individuals paid their owing tax amounts when location-specific normative messages were added to tax reminder letters. The letters were more successful the more specific they were to a recipient’s location, with the most successful letters increasing tax-compliance by 15% compared to letters without normative messages.

Rating: 5/5 (Ethical design; easy to implement)

How social norms in tax reminder letters increased payment compliance
Condition Results
No normative messages in reminder letters 67.5% of new debtors’ late payments cleared using letters 
Normative messages referencing nationality 72.5% of new debtors’ late payments cleared 
Normative messages referencing postal-code 79% cleared
Normative messages referencing town or neighbourhood 83% cleared

Key Concepts

Nudges: non-coercive ways to influence people’s behaviour by changing how choices are presented. 

Social Norms: collectively held beliefs about what behaviour is acceptable within a given circumstance or community.

Social Proof: a psychological and social phenomenon in which we copy the actions of those around us in order to conform to social expectations. 

In-Group Bias: the tendency to give preferential treatment to those who belong to our own group, while disregarding the needs of those outside the group.

The Problem

The broad reach of tax avoidance

It may be tempting to throw up our hands to some extent when it comes to the issue of tax avoidance. After all, it seems basic self-interest drives tax avoidance, and it is hard to imagine that the prevalence of self-interest is going to disappear anytime soon. Additionally, the resources required to accurately identify and sanction each tax-avoider would be immense and require an Orwellian level of government surveillance. 

Unfortunately the impacts of tax avoidance are spread throughout society, often towards those who need the most help. Tax theft negatively impacts the general public, especially those who benefit the most from state assistance or publicly-funded services.

A job for social norms?

However, behavioural science offers tools to increase tax-compliance using non-coercive, non-invasive nudges that take predictable cognitive biases into account. Instead of forcing tax compliance through hyper-surveillance or carceral measures, behavioural science helps increase tax compliance by influencing decision making processes of taxpayers. As shown in this UK experiment by BIT, simply invoking local social norms related to taxes can have a powerful impact on individual behaviour. Individuals may be self-interested, and the incentives for cheating on taxes may be hard to eliminate. However, people also strongly desire to live up to social expectations, and have a tendency to mimic the behaviour of those close to them. The experiment performed by the behavioural insights team takes advantage of these traits to influence behaviour.

Design

Sending reminder letters

Researchers from the behavioural insights team worked with HM Revenue and Customs in the UK to send reminder letters regarding 140,000 tax debts worth £290 million. The letters referenced local tax-compliance norms, i.e. “x% of people in your [country/postal code/town] pay their taxes on time.” The letters also mentioned how taxes were used to pay for local services. Three letter versions were sent, one which referenced country-level norms, one which referenced norms within a postal code, and one which references tax-compliance norms within the recipient’s town. 

Social proof: we do what others do

Behavioural science demonstrates people are biased in predictable ways and this knowledge informs the present experiment. The experiment is an example of how social proof can be the basis for a behavioural nudge. Individuals want to orient their behaviour around the social norms present within a given situation. When the norms are ambiguous or unclear, people will search for cues about how to act from those around them and tend to copy their behaviour. By referring to local tax-compliance norms, letter recipients were given a cue about how to act in a situation which is potentially ambiguous. Furthermore, as people have an in-group bias, it is expected that emphasizing the benefit of taxes for the local community instead of the country at large would be more likely to induce tax compliance.

The COM-B framework 

This intervention can be analyzed using the COM-B Framework for behavioural intervention which emphasizes the importance of capability, opportunity, and motivation for influencing behaviour.2  

  • Capability: Although individuals had equal actual capability to pay taxes regardless of the letter version received, knowing that their neighbours paid their taxes may have increased the recipients’ sense of capability. 
  • Opportunity: The recipients had the same opportunity to pay tax regardless of the letter, but the framing of the options was altered. 
  • Motivation: The letters motivated people to pay tax debts by encouraging them to live up to the social norms present in their locale. 
  • Behaviour: The intervention targeted the behaviour of tax-compliance, specifically, the payment of overdue tax debts.

Results and Application

A 15% increase in repayments

The results were striking, with one intervention increasing debt payment by 15%. In the control group (letters with no normative messaging), payment reminder letters were 67.5% effective. When letters referenced national norms, compliance rose to 72.5%, and when norms were anchored by postal code, compliance reached 79.0%. The most effective letters mentioned a norm within the recipient’s town. These letters increased compliance by 83.0%, or 15.5% more than the control group. The results show that normative messaging is highly effective, and that the group level matters referencing a more local norm is more effective. 

The power of normative messaging

These results have large implications for tax debt collection strategies, with the potential to save governments millions or even billions of dollars related to tax avoidance. While more research on effective messaging is necessary, it appears that normative messaging will be an effective addition to debt collection strategy.

Related Possible Applications

Industry

Application

Climate & Energy Individuals could be incentivized to reduce energy use by being made aware of how others in their neighbourhood are conserving energy. 
Financial Services People could be incentivized to save and invest by being made aware of how others in their in-group are being fiscally responsible.
Public Policy Eligible voters can be sent information on the voting take-up of their locality in order to increase voter turnout.

Ethics

  • Increasing tax-compliance secures funding for important public services, thus promoting a more equitable distribution of welfare.
  • Although the letters do increase tax-compliance, it would be valuable to learn more about the individual characteristics of people that complied with the normative messaging.
Yes Room for improvement Insufficient information/Not applicable
Welfare
Does the intervention demonstrably improve the lives of those affected by it? Increasing tax-compliance secures funding for important public services and alleviates those who complied from further accumulating debt.
Does the intervention respect the privacy (including the privacy of identity) of those it affects? The identities of the study participants were not disclosed.
Does the intervention have a plan to monitor the safety, effectiveness, and validity of the intervention? It is unclear whether the intervention can cause long-term changes in compliance behaviors,
Autonomy
Does the intervention abide by a reasonable degree of consent? Participants were not aware they were receiving a modified letter, but were not coerced into making any specific decision.
Does the intervention respect the ability of those it affects to make their own decisions? Participants were free to choose how they responded to the letters.
Does the intervention increase the number of choices available to those it affects? The number of choices remains the same, only the framing of choices was altered.
Equity
Does the intervention acknowledge the perspectives, interests, and preferences of everyone it affects, including traditionally marginalized groups? The study did not have a discussion of identity categories of individuals or how they could be affected in varying ways. 
Are the participants diverse?
Does the intervention help ensure a just, equitable distribution of welfare? The letters do increase tax-compliance and provide opportunities to fund public services.

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Sources

  1. Cabinet Office Behavioural Insights Team. (2011). Behavioural Insights Team Annual Update 2010-11. 
  2. Flanagan, A. E., & Tanner, J. C. (2016). Evaluating Behavior Change in International Development Operations. IEG Working Paper.
  3. Rappeport, A. (2021). “Tax cheats cost the U.S $1 trillion per year, I.R.S. chief says.” The New York Times. https://www.nytimes.com/2021/04/13/business/irs-tax-gap.html