Behavioral Insights for Tax Compliance LAST UPDATE: February 22nd, 2021 CONTENTS PARTNERSHIP ENTRY CONTEXT 06 POINTS AND DIAGNOSTIC MAPPING 13 CONCLUSION 42 DESIGNING THE JOURNEY: BEHAVIORALLY INFORMED SOLUTIONS 07 IDENTIFYING BOTTLENECKS 14 REFERENCES 44 EARLIER EVIDENCE 09 CASE STUDIES 16 ANNEX 48 6 Behavioral Insights for Tax Compliance 7 CONTEXT DESIGNING BEHAVIORALLY INFORMED SOLUTIONS Governments need sustainable funding in Behaviorally informed policy emphasizes order to uphold the social the importance of context for decision contract with citizens, as making and behavior. well as provide the public goods that can foster It examines the social, psychological, and economic factors that affect what people think and do. It addresses details in bureaucracies, growth and development. technologies, and service delivery that are often overlooked in standard policy design, but that can dramatically influence the In most contexts, raising said revenues The trends we observe build upon effectiveness of development programs and projects, especially requires an efficient, effective tax pioneering tax compliance work and in low-income contexts. Behaviorally informed policy can provide system (World Bank, 2019). But additional examples from around the creative solutions to difficult challenges, often at low cost.  standard policy measures for improving world. A subset of this evidence is taxpayer compliance – such as reforming highlighted here as well. legislation and administration – may not be enough. They may also be While unknowns remain, interventions that consider human behavior help time-consuming or infeasible due to technology infrastructure, limited individuals and firms better process HOW WE WORK information, make decisions, and submit resources, and political constraints. their tax declarations accurately and on time, and help tax administration A thorough understanding of human officials improve the way they do their behavior and how individuals interact job. The evidence presented in this with policies and programs can CONTEXT-DRIVEN EMPIRICAL AGILE policy note confirms that context is key provide creative and cost-effective when it comes to motivating taxpayers. Resources are We test multiple Results are used solutions to these challenges. This For example, reminders informed by devoted to carefully designs, each to learn and adapt policy note provides evidence from social norms work well in one place, define the behaviors based on different the program design World Bank field experiments that while punitive language performs better underpinning the assumptions about and feed into a new consider the social, psychological, and in others. We expect similar variation development challenge individuals’ choices round of definition, economic factors influencing taxpayer across other settings, presenting an and appropriate and behavior. diagnosis, design, decision-making. Complementary opportunity for future experimentation diagnosis of the causes implementation, and studies from Costa Rica, Guatemala, and exploration about how tax-related of those behaviors. testing; this process of Poland, Latvia, Kosovo, and Indonesia decisions are made around the world. refinement continues demonstrate how context-specific, as the intervention behaviorally informed messaging can is scaled up. offer an immediate, low-cost solution to bureaucratic and technological barriers. 8 Behavioral Insights for Tax Compliance 9 01. 03. EARLIER EVIDENCE • Identify the problem • Set up process for randomization • Collect background information • Trial intervention and available data This section outlines previous work about the beliefs and norms underlying • Monitor treatment and control groups • Diagnostic sessions to develop tax-related behavior. These examples provided motivation for the experimental behavioral map • Analyze data at endline designs we tested alongside tax authorities. They demonstrate how behavioral insights can be a significant driver of tax compliance and, in turn, government • Fieldwork to finalize behavioral map revenues. Strategies to increase tax compliance have included: 01. 03. I. Making the tax declaration process easier to navigate. Definition Implementation Tax authorities need low-cost ways to communicate & Diagnosis & Evaluation Provide timely, relevant at scale, but not every taxpayer relies on the information to as many same information channels. Thus, tax authorities taxpayers as possible. should consider trying different mechanisms of 05. communication. In Colombia, in-person visits were Re-define more effective at motivating delinquent taxpayers & Re-diagnose than emails and letters. In Kenya, SMS messages led to the greatest compliance (Ortega et al., 2015). These examples, among others, demonstrate again how context is key in identifying the appropriate communication channel. 02. 04. Design Adapt Reducing complexity makes it easier for citizens to Avoid bandwidth comply with what might be an otherwise overwhelming overload by simplifying process. This is true for both communication strategies the messages and the tax declaration process itself. For example, 02. 04. taxpayers receive. using easy to understand images alongside messaging to communicate information about the tax process, as was tested in Rwanda, was seen to provide better • Develop list of potential interventions • Identify key learnings information to taxpayers (Mascagni et al., 2017) • Narrow down to most feasible • Identify areas for further work The Behavioural Insights Team deployed simplified Help citizens identify letters in an effort to increase tax compliance among 05. the clear steps doctors and dentists in the United Kingdom. The letters, needed to comply with which clearly delineated the actions required of an • Investigate constraints to scaling work tax declarations. individual, saw a 15 to 30 percent higher response rate • Identify furtherbehavioral challenges than other types of messaging (Behavioural Insights Team, 2012). 10 Behavioral Insights for Tax Compliance 11 II. Prioritizing tax morale by engaging with taxpayer’s beliefs enforcement mechanisms signaled state capacity, about duty, the extent of compliance, and benefits of taxpayers felt more confident that there would be paying taxes. returns to their compliance (Weigel, 2018). People prefer to think of themselves as honest and Evidence from lab and lab in the field studies Appeal to moral. This may be why individuals are less comfortable Invite active taxpayer suggests that compliance may increase when an individual’s when their unethical behavior is described as a choice participation by taxpayers have a say in how tax revenue is spent, sense of duty and rather than simply a failure to take action (Ritov & allowing them to specify including through the provision of a feedback good citizenship. Baron, 1990). Framing non-compliance as intentional spending priorities. channel (Torgler, 2004). has increased compliance among taxpayers, likely by reminding taxpayers of their desire to be a good citizen. People are social creatures and highlighting the Promote compliance behavior of others can have a strong influence. When by making timeliness a field experiment in the United Kingdom invoked and accuracy of other’s social norms, such as referencing the average number filing commonplace. of people who pay on time, payment rates for overdue III. Using deterrence messages, which can lead to compliance, taxes increased. The payment of declared tax liabilities to update citizens’ beliefs about the costs of evasion. was boosted by up to 5.1 percentage points after 23 days of delivery, comparing to a control group Signaling an increase in enforcement mechanisms can (Hallsworth et al., 2017). Similarly, the decision not Encourage honesty make it feel risky and costly for an individual to engage to comply may be further influenced by feelings of by making punishment, in non-compliance. For example, American taxpayers unfairness. As individuals will be less inclined to pay such as an audit or were more likely to accurately self-report their taxes one’s taxes if they believe others are not paying their perception of its when they perceived a higher likelihood of being fair share, strategies can focus on demonstrating that likelihood, more salient. audited. In Denmark, those that were to be audited others are, in fact, complying (Frey & Torgler, 2007; with certainty were significantly more likely to comply Bazart & Bonein, 2014). (almost double) compared to those with a 50 percent audit probability. In Uruguay, providing firms with Helping taxpayers see how their actions can positively details on past audit statistics and penalties increased Emphasize how paying impact their own community may make a difference. compliance, and in Chile, notifying firms that they taxes is valuable. One way to do this is by specifying what public goods are being monitored and may be audited ultimately one’s taxes are used for. An experiment showed increased VAT payments (Slemrod et al., 2001; Kleven that public service messages in Rwanda (a low-income et al., 2011; Bergolo et al., 2017; Pomeranz, 2015). setting) that emphasized how taxes help provide education, healthcare, and safety led to persistent tax compliance (Mascagni et al., 2017). Similarly, in Democratic Republic of the Congo, citizens in neighborhoods where tax payments were enforced were more likely to attend townhall meetings and demand public goods and accountability. As the 12 Behavioral Insights for Tax Compliance 13 IV. Using monetary or social rewards to incentivize taxpayers directly. PARTNERSHIP ENTRY POINTS AND DIAGNOSTIC MAPPING Offering a tangible reward for the payment of taxes Provide incentives can increase the intrinsic motivation of citizens while to motivate citizens also resulting in positive spillovers for their neighbors. The World Bank partnered with the tax authorities of Poland, Latvia, Kosovo, to continue timely In Argentina, the winners of the “Good Taxpayer and Indonesia to test how behaviorally-driven solutions can improve tax tax payment. Award” lottery were entitled to the construction declaration and payment rates, enhance a tax authority’s processes, and or renovation of a sidewalk. The potential to win the ultimately increase government revenues. Similar efforts were carried out in lottery positively encouraged compliance in the short Guatemala and Costa Rica in partnership between the World Bank and the term while also allowing taxpayers to feel recognized Behavioural Insights Team. and able to better evaluate the work of the local Informed by earlier evidence, we identified opportunities to increase the government in the long term (Carrillo et al., 2017). effectiveness of tax collection, including: If a firm is to adapt their own behavior, it may be Recognizing that state authorities are well-positioned to help taxpayers Create a means of necessary for them to understand how similar firms understand the tax process and the importance of their tax-related choices. comparison with other act. In Bangladesh, when an intervention informed A state’s tax entity has the legal authority to assess, levy, and collect taxes. firms by using social firms that details of their compliance would be shared They can also use behavioral insights to provide taxpayers with information shaming as a motivator. with others, VAT payments increased. This is true and education about the tax declaration process. For example, context-specific for firms in clusters where at least 15 percent were messaging may motivate taxpayers about the process in a timely, accessible complying at baseline. A similar exploration found that way. The local tax authority can iterate on the content of these messages and an SMS message threatening to publish non-compliant mechanisms of message delivery, from letters to simple technologies. firm names online increased filings significantly Doing so can ultimately close the intention-action gap for individuals and (Chetty et al., 2014; Brockmeyer et al., 2016). firms, reminding them to submit their declarations accurately and on time. Improving on or developing quality tax systems bolsters the capacity of the tax authority, building necessary efficiency. Behavioral insights can motivate tax administrators to update their systems. This will help them better communicate with non-compliers. A commitment to reducing implementation challenges, such as data quality issues, can become self-reinforcing should the tax authority recognize that effective solutions require strong systems. These strong but adaptive systems should be the norm. Valuing tax revenues should be a priority for governments, but compliance is low in many places. In the developing world, many people do not just submit their tax declarations late. They may not submit them at all. As compliance involves action by the taxpayer, it is something that needs to be motivated. Efforts to increase government revenues should focus on how to reach non-compliers, those at risk of non-compliance, and previous delinquents. LIQUIDITY CONSTR TAX COMPLIANCE PERCEPTION OF CON SEQUENCES BANDWIDTH OVERLO AD AINT S Social, psychological, and CAN I AFFORD TO PAY WILL I GET PUNISHED HOW DO I PAY? economic factors influencing MY TAX BURDEN TODAY? IF I DON’T PAY?? taxpayer decision-making PROCESS COMPLE EIVED SOCIAL NORMS XIT PROCRASTINA PERC TIO N Y DO OTHERS PAY HOW MUCH DO I OWE? CAN I DELAY MY PAYMENT? THEIR TAXES? K OF KNOWLEDGE LAC INFORMATION OVERLO CHOICE OV AD ERLO SALIENCE OF RECIPROCITY LOW AM I REQUIRED TO AD DECLARE MY TAXES? WHAT DOES WHERE DO I PAY? WHICH IS THE BEST THE GOVERNMENT PAYING OPTION? OR FRAMING DO WITH MY MONEY? PO WHAT EXACTLY DO I NEED TO DO? Understanding Deciding Declaring Paying Tax Processes to Pay Taxes Taxes Taxes CASE STUDIES Modifying existing tax systems and processes is strategic and likely more cost effective than relying on new laws or costly incentives to enforce compliance. But the success of a behavioral strategy depends greatly on the setting. Thus, iterating based on specific policy goals, one’s target audience, types of taxes, and related environmental factors is necessary across contexts. The following case studies demonstrate how behaviorally informed messaging helps increase tax compliance in diverse settings. They also show how rigorously testing messaging design and delivery is key, encouraging opportunities for comparison. 18 Behavioral Insights for Tax Compliance 19 When the World Bank and the Costa Rican government collaborated to improve tax filing rates among firms, a simple email reminder made a big difference. The government has contact information for registered firms, so they were able to CASE STUDY 1: reach the taxpayers directly COSTA RICA and credibly threaten consequences for those who did not comply. 20 Behavioral Insights for Tax Compliance 21 The Experiment: WHY IT MATTERS This experiment looked at the effect of enforcement messaging on income tax filing and related compliance issues among 50,000 non-filers in Costa Rica. Globally, many firms are formally registered but still fail to file their Non-filers included firms that were tax-registered but had not filed their income tax declarations. This leads to lost government revenue and may tax declaration for 2014. Two-thirds of the target firms were randomly selected encourage those who already comply to stop doing so. Even if a to receive an enforcement email while the remaining received nothing. The communications intervention appears successful, there is a risk that emails contained three features: a temporary uptick in filings could lead to non-compliance later on. • Making punishment salient, mentioning potential sanctions a But, in Costa Rica, taxpayers in the treatment group remained taxpayer could be subject to, including shop closure, audit, or significantly more likely to file income tax declarations in subsequent online publication of names. years. This was persistent even when measured 2.5 years later. This is likely because of the mention of enforcement tools in the behaviorally- • Behaviorally-informed messaging, such as personalization, informed email. Facing a shop closure, audit, or phone call about simplification and highlighting social norms. discrepancies on tax returns is viewed as highly credible in Costa Rica. This confirms that people may change their behavior when what they were doing before (noncompliance, in this case) puts them at risk of an • Use of third-party information, emphasizing that reports from undesirable consequence. clients, suppliers, and financial service providers could be used to validate a non-complier’s sales and spending. The Results: The intervention improved income tax compliance, as expected. The income tax filing rate for 2014 increased by 20 percentage points within five weeks. Filing rates increased by two additional percentage points for those who received a message mentioning examples of third-party information. This also led to improved accuracy in reporting from unincorporated businesses, which are notoriously evasion-prone. Plus, firms that received an email became 2.5 percentage points more likely to file a third-party report about a client or supplier firm. These reports provide the tax authority with additional information that may help with future enforcement efforts. 22 Behavioral Insights for Tax Compliance 23 Between 2011 and 2015, tax revenue made up only 12 percent of Guatemala’s GDP. That’s less than half the average of other Latin American countries (World Bank, 2012). The World Bank, the Behavioural Insights Team, and Guatemala’s Superintendence of the Tax Administration (SAT) responded to this challenge with a behaviorally informed communications campaign. This nationwide intervention CASE STUDY 2: increased tax filings and GUATEMALA improved income tax collection, with positive results that continue to this day. 24 Behavioral Insights for Tax Compliance 25 both payments and average amounts paid. For example, the deliberate The Experiment: choice letter helped raise the average amount paid per taxpayer by $17.95, or 269 percent. A randomized control trial targeted 43,387 individuals and firms who failed to In addition to changing taxpayer behavior, we saw changes in how tax officials pay their income taxes in 2013. Delinquent taxpayers were randomly assigned approached communications and policy design. Once our collaboration ended, to receive no letter or a letter with one of five messages: officials continued integrating behavioral lessons into their communication with taxpayers, demonstrating sustainable shifts in tax officials’ attitudes and • Reminder: A simple reminder to declare taxes, with no information behaviors as well. on how to do so. • Behavioral Design: Information on where to declare, the possibility of paying in installments, and the deterrence message: “If you do not declare, you may be audited and face the procedure established by law.” WHY IT MATTERS • Behavioral Design + Social Norm: “According to our records, 64.5 percent of Guatemalans declared their income tax for the year 2013 Taxes were historically a small part of Guatemala’s GDP, but behavioral on time. You are part of the minority of Guatemalans who are yet to insights were able to fuel lasting change and build capacity at the declare for this tax.” policymaker level. • Behavioral Design + Deliberate Choice: “Previously, we have These findings are important, firstly, because this strategy is particularly considered your failure to declare an oversight. However, if you cost-effective. It was estimated that the social norms message would have don’t declare now, we will consider it an active choice, and you may, generated revenues of approximately US$760,000 if sent to the entire therefore, be audited and could face the procedure established by law.” sample. This is 36 times the cost of sending the letters. Secondly, the intervention’s success persists. 12 months later, individuals • Behavioral Design + National Pride: “You are a Guatemalan citizen, and firms were still complying with the tax declaration process without and Guatemala needs you. Be a good citizen and submit the 2013 needing an additional reminder. Behavioral techniques have also become annual return of income tax. Are you going to support your country?” ingrained in the operations of SAT and the wider fiscal authority. To this day, SAT continues to repeat and revise the experiment while the fiscal The “Behavioral Design” served as the basis for all other letters. The variations in authority explores how to apply these learnings to other areas of taxation framing helped confirm which messages were most effective in the Guatemalan and business. SAT has continued to work with World Bank teams towards context. strengthening these efforts. Finally, this study sets an example for other regions with chronically low tax compliance. Initial compliance of just 64.5 percent is just marginally a norm. The Results: But, likely due to the perceived culture of tax evasion already existing in Guatemala, the social norm message was still enough to increase the moral While all letters increased tax declarations, two were most successful. The cost of noncompliance. deterrence message, which framed non-declaration as intentional, and the social norms message, referring to declaring one’s taxes as the status quo, increased 26 Behavioral Insights for Tax Compliance 27 Polish authorities and the World Bank sent behaviorally informed letters to late taxpayers in order to combat extremely low tax compliance rates. The letters’ success emphasizes that investing in enhanced communication processes can be more strategic than adapting legislation. The letters tested ten different reminder messages and two CASE STUDY 3: methods of delivery. They POL A N D successfully increased income tax compliance and, in turn, government revenues. 28 Behavioral Insights for Tax Compliance 29 The Experiment: The Results: This randomized control trial reached 149,925 individual taxpayers across Behaviorally informed letters have a large impact on inducing tax payments, Poland. Taxpayers from both urban and rural areas were randomly assigned to increasing payment amounts, and reducing tax liabilities in Poland. The most receive either a default reminder letter (known as a Dunning letter) or one of successful letter saw a 20.8 percent increase in the number of compliant taxpayers. nine behaviorally informed letters. The letters were sent to individuals who Taxpayers in Poland were more likely to pay the income tax due, pay higher amounts had declared their taxes for the 2015 fiscal year but had failed to pay what they of taxes, and reduce their tax liabilities after receiving a harder tone message. owed by the deadline. Letters sent by regular mail were just as effective as those sent via registered mail. The behaviorally informed letters included different introductory paragraphs Thus, the tax administration could save substantially by changing its delivery method and varied in tone: to the lower-cost option. Finally, demographics make a difference. Women had a higher repayment rate • Soft-Tone Messages: These messages highlight social incentives. This overall and responded best to the hard-toned message. Letters with public goods included reinforcing social norms by informing taxpayers about the messages were not as effective among people 50 to 64-years-old but increased high percentage of residents that had paid their taxes on time. Positive compliance among younger people and rural taxpayers. An explanation could be that framing was used to explain how taxes finance schools, roads, and youth and rural taxpayers see themselves as more likely to benefit from the public safety, and negative framing outlined how those services cannot be goods listed in the letter. provided without taxes. • Hard-Tone Messages: These deterrent messages highlight sanctions for non-compliance or frame non-payment as an intentional, deliberate choice. WHY IT MATTERS Some letters used a blend of these techniques. Subsets of the population responded to different types of behavioral messaging, reconfirming how attitudes and behaviors are highly The method of delivery also varied. Some taxpayers received the letter via regular context-dependent. While further analysis is needed to better understand mail, where the post office delivers the letter to the mailbox of the taxpayer. the specific reasons for differences in compliance, calibrating reminder Others received the original Dunning letter via registered mail, a highly formalized messages to different audiences can effectively increase both tax compliance process where the taxpayer confirms receipt with a signature, and the tax office is and government revenues. Plus, where Poland differs from previous notified that the letter was successfully delivered. Not all combinations of delivery experimental cases is that hard-toned messages worked best. This type methods and messages were tested, which would have unnecessarily complicated of message had been least effective in other studies, including Guatemala the experiment. and the United Kingdom. In all cases, however, the behavioral messaging strategy led to similar cost savings for governments. This exploration demonstrates that policymakers might want to review the delivery methods used to communicate with citizens. This may increase efficiency and cost- effectiveness, especially in the era of digital communication. 30 Behavioral Insights for Tax Compliance 31 It is estimated that Latvia’s shadow economy makes up close to a quarter of the country’s GDP, well above the average of 14 percent among other OECD countries (Hazans, 2011; World Bank, 2017). Part of this shadow economy includes individuals who are partially or fully self-employed and had been delaying or failing to submit their tax returns in the past few years. Our field experiment targeting taxpayers presumed to be part of the shadow economy shows that behaviorally informed messages – this time sent by email – can CASE STUDY 4: improve compliance with the LAT VI A tax declaration submission process even among a group that is challenging to reach. 32 Behavioral Insights for Tax Compliance 33 The Experiment: The Results: This experiment involved sending preemptive, behaviorally-informed email Tax declaration submission rates were higher than the control group for every messages to taxpayers presumed to be part of the shadow economy. These treatment group. Individuals in the treatment groups were also more likely to individuals are formally part of the tax system, although they do not receive a submit their Annual Income Declaration sooner, and before the deadline. On regular salaried income. Those targeted, too, had previously delayed or failed to average, those who received the social norm message submitted almost three days declare tax obligations in one or more of the previous three years. sooner than those in the control group. In advance of the 2017 filing deadline, 4,324 taxpayers identified by the State In Latvia, as in Poland, the most successful message included a harder tone that Revenue Service (SRS) were randomly assigned to receive one of three treatment made salient the role of one’s deliberate, active choice to not comply. The harder emails or no message, if part of a control group. Consequently, 1,081 individuals toned message improved subsequent compliance more than a social norms received each message or were randomly placed in the control group: message by 9.4 percent. Still, both a simple reminder and a social norm message also increased timely submission. • Simple Reminder: The first included three short, easy-to-read The impact becomes stronger when controlling for other drivers of compliance, sentences reminding individuals of the tax timeline. It provided a link such as demographics, past income, and tax payment behavior. Females who had to the online submission system and contact information (i.e., a phone higher revenue in the 2015 tax year were more likely to submit by the deadline. number) in case of questions. Signing off with the name of the Chief Those who delayed submission only in 2015, compared to in years prior, were Tax Inspector made the message more personal, as the names of the also more likely to submit by the deadline. recipients could not be included for technical reasons. • Omission/Commission Approach: The second message stated that previously missed deadlines were considered unintentional and inadvertent (i.e., an honest omission). However, future failures would be considered deliberate (i.e. commission). WHY IT MATTERS • Social Norms: The third message highlighted the descriptive norm This intervention again demonstrates that context matters when integrating that an increasing number of taxpayers filed by the deadline each year. behavioral science into messaging for taxpayer compliance. But perhaps While social norms messaging typically includes specific statistics, more important is the unique nature of the target audience. Tax authorities language on the increasing trend was included as descriptive data are actively seeking opportunities to reduce the shadow economy. Thus, this study has positive implications on the type of programming and messaging was unavailable. that may be replicated in other regions. 34 Behavioral Insights for Tax Compliance 35 Unlike other countries that collect significant non-tax revenues (for example, from natural resources), the Kosovar government relies on taxes for more than 85 percent of its revenues. Thus, it is critical to ensure tax collection is not expensive for the public administration, and all comply with the process. The Tax Administration of Kosovo (TAK) worked with the World Bank and the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) to address this challenge using behavioral insights. Three experiments successfully increased the number CASE STUDY 5: and timeliness of tax KOSOVO declarations while helping identify ways to improve the tax administration’s capacity. 36 Behavioral Insights for Tax Compliance 37 The Experiment: The Results: Enhancing tax compliance in Kosovo involved sending behaviorally informed Within four to six weeks, all three trials induced more people to submit letters, e-mails, and short messaging service messages (SMS) to taxpayers. The their declarations on time or to submit at all. For example, submissions by messages were designed to induce timely and honest declarations and payments at PIT taxpayers increased by 2-4 percentage points within one month of the low cost or no cost. These interventions targeted taxpayers subject to the personal transmission of the letters. income tax (PIT) and value-added tax (VAT): But, despite statistically significant results, process errors were rampant. Only 48 percent of letters made it to their intended recipients, and less than one in • Letters: Trial 1 targeted a letter at taxpayers who, by four days after four e-mails was opened. The messages themselves were not always interpreted the deadline, had not submitted their PIT declarations for the 2017 as intended as well. These implementation challenges highlighted the need to fiscal year. establish and update tax collection functions and data systems while carefully evaluating word choice in communications. • E-mails: Trial 2 targeted all firms required to submit June VAT declarations with e-mail–based reminders. The first reminder was sent well in advance of the monthly due date. The second was sent on the declaration’s due date. WHY IT MATTERS • SMS Reminders: Trial 3 targeted all firms required to submit August VAT declarations with SMS-based reminders, sent a few days in Kosovo is one of the poorest and youngest countries in Europe in terms advance of the due date. of gross domestic product (GDP) per capita, demographics, and statehood. Between 2011 and 2017, total government revenue amounted to about A key component of the experimental design centers on the taxpayer as a client, 14 percent of GDP, below the average of 19 percent among European informing the decision to promote positively framed messages, such as the benefits and Central Asian countries. As a small country that depends greatly of paying taxes, rather than the negatively framed messages that worked in other on revenue capture, this experiment suggests that investing in process contexts. upgrades will help ensure people get the information they need in a timely and motivating way. By participating in the design and implementation of the trials, TAK staff were able to understand the value of behavioral science tools, motivating them to engage in improving the systems that will improve their interactions with taxpayers. 38 Behavioral Insights for Tax Compliance 39 Indonesia is the largest economy in Southeast Asia. Here, the 59 million Small and Medium Enterprises (SMEs) make up 89% of all employment, contribute to 14% of exports and provide 58% of domestic investment. After a recent tax reform in 2018, SME tax compliance has reached 15% nationally, providing the potential to expand further the tax revenue. The Directorate General of Taxes (DGT), the country’s tax authority, worked with the World Bank to look at whether behaviorally CASE STUDY 6: designed information to INDON E S I A taxpayers could impact compliance rates and payment amounts. 40 Behavioral Insights for Tax Compliance 41 The Experiment: The Results: Following the introduction of a new Government Regulation in 2018 (no. Fifteen months after delivering the calendars, participating SMEs improved their 23/2018), SMEs with a yearly turnover of up to Rp 4.8 billion (approximately payment rates by 4%, increasing their compliance rate to 25%. Their monthly USD 350,000) are required to declare and pay 0.5% of their monthly gross paid amount was also improved by 7% to Rp 115,000 (USD 10), compared to the revenue. To motivate these behaviors among firms, the project provided an official control group. letter accompanied by a behaviorally-informed calendar to 18,000 SMEs from across 40 tax districts in Java, where 61% of SMEs in the country are based. The results also showed that the calendar with deterrence messages was the Participating firms were randomly assigned to a control group or one of three most effective in attracting SMEs to pay their tax obligations (i.e.,increasing tax experimental groups, each with different calendars. The groups were balanced, compliance), while the calendar providing salient information increased to the with 6,000 firms in each one. largest extent the amount paid by compliant SMEs. The calendars included the following messages: At the end of the analysis period, the experiment yielded a total revenue 37 times larger than the net cost of implementation. It also increased the revenue collected for participating offices by 3%. • Salient Information: providing essential information about the tax regime in a salient way using clear and simple language, including an explanation on how Calendar distribution was highly successful, with a delivery rate of 86% of the to estimate the monthly payment following a rule of thumb, a reminder of the intended recipients. Implementation costs were estimated at a modest average due date for each month, and a step-by-step guide on how to pay. SMEs were of USD 3 per participant. addressed as “BIJAK”, an acronym for a compliant business which also means “wise” in Indonesian. • Salient Information + Public Goods: emphasizing public investments financed with tax revenue through seven messages, such as “34% of tax revenue contributes to an equal income distribution”; “taxes help 19.7 million WHY IT MATTERS: poor students go to school”; and “taxes provide Rp 410 trillion to build roads, The experiment in Indonesia added to the value of testing different bridges, and infrastructure.” content to motivate different behavioral change and information resources to improve tax compliance. However, and most • Salient Information + Deterrence: with eight messages stressing that importantly, the experience is unique regarding the context and the timely payment helps businesses avoid fines and reinforcing the negative tax regime considered. First, the experiment’s target population was consequences of late or non-payment, such as “the DGT has access to financial SMEs, a key element in the economy of any developing country, information of firms”; “after the due date, you are subject to a 2% interest including Indonesia. Furthermore, the behavior promoted for these payment”; “tax arrears can lead to actions like freezing of bank accounts, taxpayers was that of paying and reporting consistently every month, restriction to travel abroad, confiscation of assets, or arrest.” not merely once during a fiscal year. Finally, by working closely with a network of 40 local tax offices, the tax authority is now eager and Letters and calendars were mailed to participants between September and prepared to scale up this impactful intervention and to conduct its November 2018. own evaluations that inform its programs and policies. 42 Behavioral Insights for Tax Compliance 43 CONCLUSION Approaching communication with taxpayers from a behavioral lens can produce ABOUT EMBED considerable gains. The World Bank’s experimental The Mind, Behavior, and Development Unit (eMBeD), efforts alongside the tax the World Bank’s behavioral science team in the administrations of Costa Rica, Poverty and Equity Global Practice, works closely Guatemala, Poland, Latvia, with project teams, governments, and other partners Kosovo, and Indonesia suggest to diagnose, design, and evaluate behaviorally informed promising results. interventions. By collaborating with a worldwide network of scientists and practitioners, the eMBeD These interventions are meaningful This exploration also points out the team provides answers to important economic and in that they do not require onerous, need for tax administrations to focus on social questions, and contributes to the global effort administratively expensive, or their methods and structures as well. to eliminate poverty and increase equity. politically sensitive reforms or For example, should a tax authority programs. They also highlight the lack reliable contact information power of experimentation: testing or data on taxpayers, all methods of different messages with one’s audience. communication may fail to reach the The effects of a particular message intended recipient. Thus, behaviorally may be different in one country when informed capacity building of local compared to the next, and even within partners can ensure each intervention demographic groups and regions in a creates space for the adaptation country. The mechanism with which and learning required to motivate a message is received, such as letters, the most effective tax policies and email or text message, will also vary programming possible. in effectiveness. Prepared for the Mind, Behavior, and Development Unit by Abigail Dalton (Operations Officer, the World Bank) and Lauren Manning, with contributions from Julian Jamison (Professor of Economics, University of Exeter), Iman Sen (Research Analyst, the World Bank), Jonathan Karver (Research Analyst, the World Bank), Jorge Luis Castaneda (Economist, the World Bank), Lorena Guedes, and Serrana Mujica. 44 Behavioral Insights for Tax Compliance 45 REFERENCES Bazart, C., Bonein, A. Reciprocal relationships in tax compliance decisions. 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Increasing Tax Compliance in the Shadow Economy in Latvia (English). eMBeD brief. Washington, D.C. : World Bank Group. Statistics Indonesia (Badan Pusat Statistik). 2017. “Potensi Usaha Mikro Kecil, Sensus Ekonomi 2016”. BPS: Jakarta. Torgler, B. (2004) 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. Weigel, Jonathan. 2018. “Building State and Citizen: How Tax Collection in Congo Engenders Citizen Engagement with the State.” Working Paper. World Bank Group. (2017) Latvia Tax Review. Working paper 120580. 48 Behavioral Insights for Tax Compliance 49 ANNEX BEHAVIORAL BASELINE LETTER – ENGLISH translation Figure 1a. Kosovo - Simple Reminder Letter Figure 2a. Poland - Simple Reminder Letter Stay Connected eMBeD@worldbank.org #embed_wb worldbank.org/embed bit.ly/eMBeDNews