How to get tax payments up by 43% - using behavioural economics

By Medha Basu and Nurfilzah Rohaidi

UK’s Behavioural Insights Team shares lessons from the developing world.

How can countries get more citizens to pay taxes? Indonesia, for example, has only 11% of the population registered to pay income tax, which leads to a massive shortfall in revenues.

Tax amnesties and high profile court cases can help, but what if there is a simpler approach? Guatemala sent tax reminder letters saying that 64.5% of their fellow citizens declared their income tax on time - causing a 43% increase in payments in just 11 weeks. Peer pressure is effective, it seems.

This was an experiment by the UK Behavioural Insights Team (BIT) and the Guatemalan Tax Authority. GovInsider caught up with BIT to find out other advice they have on using behavioural economics.

Pay up

The Guatemala experiment was a replication of an earlier trial in the UK, which demonstrates how there are common approaches that be can be taken across different nations. “We have tried similar techniques in Guatemala and Mexico, where the tax payment rates and tax regimes in general are very different to the UK,” says Samuel Hanes, Director of BIT’s Singapore unit.

Moreover, the effect of the new letter was not just one-off; it can increase tax revenues in the long-term. The effects are “persistent and remain at 12 month follow up”, a report on the Guatemala experiment says. This suggests that “the letters actually increased revenue for the tax authority, rather than just bringing tax receipts forward”.

Sugar tax

Behavioural insights can help people to choose healthier meals, which is vital for countries with high rates of obesity and diabetes. BIT Australia conducted a trial to find out the impact of a 20% price increase on sugar-sweetened drinks in some of the country’s hospitals. There was a “significant” 44% reduction in the number of sugary drinks being sold, the results show.

“The UK has confirmed that we are going to introduce a sugar tax next year,” David Halpern (pictured above), Founder of BIT, says. “It’s already driving extensive reformulation in relation to drinks.” He adds that Mexico has already introduced a sugar tax, and is one of the examples that BIT is looking to.

Research in the Philippines shows that malnutrition in children and adults can be “a behavioural issue, not an income one”, Hanes adds. It is “at least theoretically possible” to consume the right calories and micronutrients even on a low income, but it would be a very restricted diet - just bananas and eggs, according to MIT economist Esther Duflo.

While the choice to eat just a handful of nutritionally-dense foods may “not necessarily be an easy one” to make, it is important that there is access to them. “How do you put the right measures in place such that it’s easy for people to choose a diet that’s healthier for them?”

Cutting corruption

Behavioural economics is now being used to tackle corruption, Halpern says. “Even though transparency has been the primary tool that's often been used, but often it doesn't work that well by itself,” he says. New techniques are required, and BIT is working to develop them.

There are, however, challenges to using behavioural sciences in developing countries. One of the biggest is a lack of data, Halpern says. “If you don't have a good data infrastructure, it’s much harder to use these empirical methods,” he says.

Halpern’s team was born out of the British Prime Minister’s Office, but has found its experience applicable in developing countries. “One of the really big surprises we’ve seen over the last five years is that stuff is remarkably transferrable to other countries,” Halpern says.

The UK Behavioural Insights Team will be in Singapore at Innovation Labs World on 26 September 2017 to share lessons on improving public services. Register today