Holz, List, Zentner, Cardoza, and Zentner (2020) on Nudging Tax Compliance

Justin E. Holz, John A. List, Alejandro Zentner, Marvin Cardoza, and Joaquin Zentner, “The $100 Million Nudge: Increasing Tax Compliance of Businesses and the Self-Employed Using a Natural Field Experiment.” NBER Working Paper 27666, August 2020 (pdf here). 

• The tax authorities send you a message… 

• ...maybe the message just happens to mention the upcoming tax filing deadline: the control arm 

• ...maybe the message also notes the potential for your tax evasion to be publicized – one treatment arm, designed to increase the salience of social penalties for being a tax cheat. 

• ...maybe, instead of highlighting the public nature of identified tax evasion, the message notes the potential for your tax evasion to result in imprisonment – another treatment arm, designed to increase the salience of criminal penalties attached to tax evasion. 

• And for each of the three arms noted above, we can take half of the letter recipients and also mention in the letter that the tax authorities are prepared to potentially view mistakes in tax declarations, even honest mistakes, as intentional. (The notion is to frame evasion as a sin of commission, not of omission.) Mistakes imply that you were trying to be a tax cheat! 

• This very natural field experiment is conducted in the Dominican Republic, circa 2019, n≈56,000 firms and n≈28,000 self-employed people; tax evasion reportedly is rife in the Dominican Republic. 

• The field experiment applies to business entities subject to the corporate income tax and to self-employed taxpayers subject to the individual income tax. 

• The various messages are sent shortly before the tax filing deadline. 

• The threat of public disclosure of tax evasion dissuades tax evasion for both firms and individuals. 

• The “prison” message also reduces evasion, and for firms, about twice as effectively as the “publicity” message. 

• Framing evasion as an active choice, a sin of commission, in itself (without publicity or punishment prompts), does nothing (or worse than nothing), and likewise is ineffective if it is paired with the publicity notice. 

• But the combination of “intentional” framing with the prison message doubles the impact of the prison message. 

• The effectiveness of the interventions seems to arise from a decrease (by 20%) in potential taxpayers who declare (falsely, presumably) that their income is below the minimum required for taxation. 

• Large firms drive the reduced tax evasion – there is little or no compliance gain from the smallest 60% of taxpayers.