Research Brief: At Tax Time, A Little Nudge Goes a Long Way

What Did The Study Look At?

Enforcing tax compliance and recovering debt is costly for governments. External motivators, such as interest charges, and intrinsic motivators, such as a desire to contribute to the public good, work well for getting individuals to pay their taxes. But these motivators may not be as effective for organizations. This may be due, in part, to a “diffusion of responsibility,” where the moral drivers that often motivate decision making are not as acutely felt in a group. In this study, researchers wanted to know if they could influence the rate at which organizations paid their overdue taxes using a psychologically informed, costless change – or “nudge” – to the way in which those organizations were reminded of their outstanding debts. If so, could these nudges work repeatedly? The study is among the first that looks at applying behavioural science/economics techniques to organizations.

How Was The Study Designed?

The researchers partnered with the Ontario government to see if they could drive up the number of organizations filing their taxes. After identifying more than 6,000 organizations that had failed to file their Employer Health Tax returns on time, the researchers randomly sent out one of two letters: either Ontario’s standard late notice, which served as the control, or a revised experimental late notice. Both letters informed the organization that their tax return had not yet been received and that they were currently accruing interest charges and penalties. The experimental letter, which was written in active, simplified language, also included step-by-step instructions on when, where, and how to file a tax return. In addition, it provided a concrete payment deadline, rather than advising them to pay “immediately.”

What Did The Study Find?

• A simple, no-cost change to province’s collection letter resulted in a 61 percent increase in the number of organizations filing overdue taxes in 2014 and a 54 percent increase in 2015.
• Simplified communications that provide clear, concrete instructions about when, where, and how to file taxes are highly effective at promoting timely tax payment.
• Organizations receiving the revised experimental late notice were significantly more likely to file their tax returns before the amended 10-day deadline, saving the government tens of thousands of dollars in costs associated with recovering debt.
• These simple changes to the letter continued to be effective after repeated exposures, as evidenced by organizations that received the experimental letter across multiple years.

What Do I Need To Know?

Taxes are a critical source of revenue for governments. In Ontario, for example, corporate taxes make up more than 18 percent of the province’s total tax revenue. The more governments spend on enforcing tax compliance, however, the less they have to spend elsewhere.

Penalties go only so far. Previous research has shown that they are not the only reason individuals file. Prior to this study, it wasn’t known if penalties were the only reason organizations file. Given that the researchers were able to get more firms to file, and to file faster, without changing financial incentives, there may be other factors, such as procrastination, that explains why organizations fail to pay their taxes.

This study indicates that choice architecture – the ways in which choices can be presented to end-users – has a role to play in influencing how organizations behave. When it comes to collecting taxes, this research demonstrates that a simple, no-cost change to the letters sent to organizations who are late filing their returns can have a large impact on payment procrastination.

In fact, when it comes to paying taxes at the organizational level, it may be the lack of a concrete plan – rather than a lack of motivation – that leads to procrastination. Providing details about when, where, and how to pay taxes, along with an explicit deadline date, has a measurable effect on payment compliance among organizations. And these changes continue to be effective even after multiple exposures — it’s not just novelty that nudges them in the right direction.

Title: Effectiveness of Repeated Implementation Intention-Interventions on Organizations’ Likelihood to File their Overdue Taxes

Authors: Julian House (Rotman School of Management), Nicole Robitaille (Smith School of Business), Nina Mazar (Rotman School of Management)

Published: Download the PDF

—Meredith Dault