Why behavioural insights matter

Non-compliance in paying taxes affects public revenues, trust in governments and perceived levels of fairness. On the one hand people and business may try to reduce their tax liabilities legally (using certain avoidance techniques) or sometimes illegally (tax evasion, e.g. by underreporting their incomes on their declaration (individuals) or not issuing receipts for transactions (businesses)). On the other hand non-compliance may be unintentional or rooted in the – missing – interaction between the drivers of individual behaviour and complex taxation rules, provision of relevant information at the right time, and systems that allow taxpayers to fulfil their obligations easily.

Behavioural insights can explain people’s decisions when it comes to taxes, for instance

• Avoidance/evasion can be 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.
• People are also more likely to declare their income and pay their taxes when they are aware of their obligations, receive digestible information at the right time, and the process is easy.
• 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. Examples include:

• 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 .
• Simplifying tax letters
  Sending reminders at the appropriate time and 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.
• Reducing anti-tax sentiment
  Giving a voice to taxpayers on how their taxes should be spent increases compliance, by improving attitudes generally towards taxation.

Projects

• Strengthening tax compliance by implementing behavioural insights for revenue administrations in Member States

  The European Commission is supporting Austria, Belgium, and Portugal to improve tax compliance with behavioural insights by providing funding and technical expertise through its Technical Support Instrument (TSI) managed by the Reform and Investment Task Force – SG REFORM. At the CCBI, we are contributing to this project with expert knowledge, technical assistance, and capacity building activities in the Member States .