The Basic Idea
You know the saying: nothing is certain except death and taxes.
Despite the idiom’s wisdom, some go to extreme lengths to avoid its inevitabilities. And we’re not just talking about immortal robot bodies to hold our brains ad infinitum. We’re talking about tax avoidance.
While it can be effortful to maintain compliance with all relevant tax regulations, it can be equally effortful to avoid them. There are legal loopholes for tax avoidance, like postponement of taxes and income splitting.2
Theory, meet practice
TDL is an applied research consultancy. In our work, we leverage the insights of diverse fields—from psychology and economics to machine learning and behavioral data science—to sculpt targeted solutions to nuanced problems.
Trust and power affect tax compliance: in a study spanning 44 countries, researchers found that increased trust in authorities and power of authorities leads to greater intended tax compliance and assuaged tax evasion.3
Some scholars argue the biggest concern in the tax space is wealthy tax-payers avoiding paying some or all of their taxes.4,5 The majority of studies show that the average wealthy person is less likely to be tax compliant than a middle-class citizen.6 In fact, the higher someone’s income, the less honest they are in filing their taxes.7–9
The Behavioral Science
Social norms - the collection of rules and standards that inform group behavior, both directly and indirectly impact tax compliance.12
Previous studies have shown that tax compliance can fall near zero when social norms lean toward non-compliance.13 Since it’s painful to see money go, social norms significantly affect how one perceives this necessity.
The Kingdom of Lesotho, home to more than 2 million, is a member country of the Southern Africa Customs Union (SACU).
Since the late 2010s, SACU revenues from Lesotho have decreased significantly, leading the Government of Lesotho to reach out to The Decision Lab to identify ways of encouraging tax compliance.
The Decision Lab drew on behavior change techniques, conducted 80+ qualitative and quantitative surveys, and mapped out decision-making journeys for different taxpayer personas. The result was a behavioral science tax compliance toolkit and detailed recommendations for the client as it rolls out its Tax Modernization Project.
If you would like to learn more about the project, you can read about it here.
1. Tax compliance. (n.d.). EY. Retrieved September 16, 2022, from https://www.ey.com/en_us/tax-compliance
2. Alm, J. (2019). What Motivates Tax Compliance? Journal of Economic Surveys, 33(2), 353–388. https://doi.org/10.1111/joes.12272
3. Batrancea, L., Nichita, A., Olsen, J., Kogler, C., Kirchler, E., Hoelzl, E., Weiss, A., Torgler, B., Fooken, J., Fuller, J., Schaffner, M., Banuri, S., Hassanein, M., Alarcón-García, G., Aldemir, C., Apostol, O., Bank Weinberg, D., Batrancea, I., Belianin, A., … Zukauskas, S. (2019). Trust and power as determinants of tax compliance across 44 nations. Journal of Economic Psychology, 74, 102191. https://doi.org/10.1016/j.joep.2019.102191
4. Bregman, R. (2018). Utopia for realists. Bloomsbury Publishing.
5. Piketty, T. (2014). Capital in the Twenty-First Century. In Capital in the Twenty-First Century. Harvard University Press. https://doi.org/10.4159/9780674369542
6. Gangl, K., & Torgler, B. (2020). How to Achieve Tax Compliance by the Wealthy: A Review of the Literature and Agenda for Policy. Social Issues and Policy Review, 14(1), 108–151. https://doi.org/10.1111/sipr.12065
7. Crane, S. E., & Nourzad, F. (1986). Inflation and Tax Evasion: An Empirical Analysis. The Review of Economics and Statistics, 68(2), 217–223. https://doi.org/10.2307/1925500
8. Feinstein, J. S. (1991). An Econometric Analysis of Income Tax Evasion and Its Detection. The RAND Journal of Economics, 22(1), 14–35. https://doi.org/10.2307/2601005
9. Pommerehne, W. W., & Weck-Hannemann, H. (1996). Tax rates, tax administration and income tax evasion in Switzerland. Public Choice, 88(1), 161–170. https://doi.org/10.1007/BF00130416
10. A Decade Of Billionaires: 2010-2020. (2020). Forbes. https://www.forbes.com/decade-of-billionaires/
11. Dolan, K. A., & Peterson-Withorn, C. (2022). Forbes Billionaires 2022: The Richest People In The World. Forbes. https://www.forbes.com/billionaires/
12. Bobek, D. D., Hageman, A. M., & Kelliher, C. F. (2013). Analyzing the Role of Social Norms in Tax Compliance Behavior. Journal of Business Ethics, 115(3), 451–468. https://doi.org/10.1007/s10551-012-1390-7
13. Alm, J., McClelland, G. H., & Schulze, W. D. (1999). Changing the Social Norm of Tax Compliance by Voting. Kyklos, 52(2), 141–171. https://doi.org/10.1111/j.1467-6435.1999.tb01440.x