Nudging: making tax payers actually pay


Blog article / Monday, March 26th, 2018

A while ago I was tipped of a podcast by the every brilliant guys of Freakonomics, titled: ‘Fighting poverty with actual evidence’. It’s a great podcast about how people can be psychologically incentivized to change behavior and make more sustainable financial decisions (which is a big problem – globally and more specifically in the US and UK).

One awesome example from that podcast, is ‘nudging in practice’ (for more information on nudging in finance, also read my previous article). Bob Cialdini wrote a great book about this, called: “Influence, the Psychology of Persuasion” (download full PDF here). Nudging is a ‘psychological tool’ that allows people to change behavior and increase intrinsic motivation, via subtle cues, tips or hints and is often considered more effective than extrinsic motivational cues (e.g. fines, financial rewards, etc.).

A good example of nudging outside finance, is something in Holland called ‘Holle Bolle Gijs’ in the Efteling: a guy with an open mouth that sucks in paper trash when you hold it close to his mouth (constantly screaming: “papier, hier!” – or: “paper, here!”). It’s not only fun to feed him paper, but it also keeps the park clean.

Case: nudging in paying taxes

In this particular case, the UK council wanted to try new ways to see how they increase the amount of required tax payments, as people are often late with paying their dues.

Within the UK government, there is a special division called the ‘Nudge unit’ (Wikipedia, official website). Their sole goal is “…to apply nudge theory (behavioural economics and psychology) to try to improve government policy and services as well as to save the UK government money.”

What they found, is very simple yet a very effective insight for understanding the importance of nudging in practice: the problem was that people were not paying their taxes for a specific income type, namely Schedule C income for small business owners. Many people were late paying those taxes. The tax office wrote letters but many people were still late, did not respond nor pay. Time to get to work!

The experiment consisted of three stages:

First, they sent an ‘honest letter’, asking nicely if they would please pay their taxes. This helped collecting tax just slightly.

Second, a letter was sent with either a positive or negative nudge, comparing the addressee with peers. A positive nudge would be (for example):

“More than 65% of people around you pay their taxes on time.”

A negative nudge on the other hand, would be:

“Did you know that you are part of the 35% that didn’t pay their taxes?”

As it turned out, this second letter positively impacted the amounts paid- showing the power of nudging already. According a similar Canadian experiment, the negative nudge worked better than the positive one (9% improvement versus 8%).

Last – and most powerful – they sent a letter that showed text along the lines of:

“if you pay your taxes, we are able to build a new park near your house for kids to play in, so please help us in doing so.”

Summarized, we can put it as follows:

What does this teach us?

Well, this specific example very clearly shows how nudging – in the form of peer comparison and ‘projected personal impact’ – positively correlates with the set objective (collecting more taxes).

More broadly, I’m a big fan of nudging because it offers a (cheap) way stimulate behavior and increase intrinsic motivation. I say cheap, because it’s about changing the initial message (in this example), rather than sending X reminder letters – which would significantly push costs. The simple fact of a better message as such, is more effective than spending additional money on more ‘forced’ manners to stimulate behavior (or: extrinsic motivation, such as fines, discounts, or other financial triggers).

Nudging is a great way to increase intrinsic motivation as people clearly see why or how they are improving their lives, as a result of a certain action. This can be used in finance, retail, public, or any other industry in which changing behavior is important for making better decisions.

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Update April 4: Look at this great nudging example, I found in Chetumal, Mexico last week:

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