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Behavioural insights for tax policy

Behavioural factors help explain why people do or do not pay their taxes. These insights can inform tax policies.

Why behavioural insights matter

Some people pay their taxes promptly and willingly. Others will try to reduce their tax liabilities, sometimes legally (using certain avoidance techniques), but sometimes illegally (tax evasion), e.g. by underreporting their incomes on their declaration (individuals), or not issuing receipts for transactions (businesses).

Behavioural insights explain people’s decisions when it comes to taxes

  • Avoidance/evasion is fuelled by distrust toward governments.
  • People are more likely to pay their taxes if they anticipate they would feel guilty if they don’t pay.
  • Preferences for fairness and altruism can explain why people pay taxes even when the chances of being checked are low.
  • Social norms – for instance, our expectations regarding other people’s attitudes toward tax fraud – can have a huge impact on whether we pay taxes.

Understanding these behavioural factors can increase the effectiveness and efficiency of tax policies and, ultimately, benefit society.

How behavioural insights can help

Behavioural insights can help us design better tax policies. For instance

  • Curbing sales receipt dodging
    Turning VAT receipts into lottery tickets may increase the chances that clients will ask for a receipt when going to restaurants and shops. This can increase tax compliance by these retailers (see this paper).
  • Simplifying tax letters
    Simplifying the messages given to taxpayers in letters about tax they owe, highlighting the action they need to take, step by step, as well as the risk of prosecution, can lead to faster tax collection (see this this study (PDF) and this study).
  • Reducing anti-tax sentiment
    Giving a voice to taxpayers on how their taxes should be spent increases compliance, by improving attitudes generally towards taxation (see this paper).

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