Can Taxpayer Compliance Benefit from A Little Nudge?

January 2020
Topics: Decision Support (General), Decision Theory, Economics, Taxation
The Pennsylvania Department of Revenue wanted to take small, simple, cost-effective steps to improve tax collections. MITRE’s social behavioral scientists developed a plan to "nudge" taxpayers into complying with overdue payment requests.
Person walking up stairs

A reminder, a suggestion, a notice, a warning. They're all examples of a nudge.

Grounded in the field of behavioral economics, nudging is a way of encouraging people to make better decisions while preserving their choices. That's a crucial distinction—choice.

One well-known application of nudging is placing healthy foods at eye-level in grocery stores. Shoppers are steered toward better options, but they’re still free to buy junk food if they want.

"The idea is a small change with a disproportionate impact," says Laura Leets, Ph.D., principal investigator for MITRE’s nudge research team. "It's not new, but the application to public policy is new."

The concept of using behavioral insights to guide public policy was popularized by the 2008 book Nudge: Improving Decisions About Health, Wealth, and Happiness. Since then, governments across the world have launched "nudge units" designed to improve health and safety and make agencies more efficient.

When the Obama administration’s nudge unit was disbanded in 2017, MITRE's independent R&D program stepped in, creating its own Nudge Lab to fill the gap.

"Given the quality of our social behavioral science team and our expertise in research for government agencies, we were well suited to continuing this work," Leets says.

In Pennsylvania, Nudging Taxpayers into Greater Compliance

One of the first projects the MITRE team tackled was to help the Pennsylvania Department of Revenue find cost-effective ways to increase voluntary taxpayer compliance.

"We wanted to look at small, incremental, gentle interventions, just to remind taxpayers what their obligations are,” says Radee Skipworth, the agency's deputy secretary for compliance and collections. "In our opinion, most taxpayers want to be compliant."

The Nudge Lab team re-designed a Pennsylvania tax delinquency notice to simplify the text and offer clear choices. They drew on the experience of MITRE's Jodi Patterson, who led a three-year project to simplify tax letters in her previous role at the IRS.

"The IRS had been getting complaints for years about how their notices were incomprehensible," Patterson says. "We began a complete transformation of the notices, using plain language to help people understand their obligations and what to do if they couldn’t pay."

For the Pennsylvania study, the Nudge Lab team also cast a wide net for empirical data, examining results from similar case studies in states and countries from Minnesota to Guatemala.

"We came up with a 'nudge notice' that had a large 'pay now' stamp at the top," says MITRE's Amber Sprenger, Ph.D., a behavioral social scientist specializing in judgment and decision making. "It highlighted what you owe, options for payment, and the consequences if you don’t respond. We reduced the amount of text and legalese. We revamped it completely."

"It was definitely radical—just head and shoulders above what we've done in the past,” says Pennsylvania Department of Revenue's Skipworth. "The nudge gave taxpayers the right information, high on the page, and clearly explained what to do. Beyond that, the MITRE team brought capabilities in measuring response rates and statistical analysis."

The Pennsylvania study focused on small businesses. To test the effectiveness of the nudge, our team divided the non-compliant taxpayers into groups. All groups first received the tax agency's standard notice. After that, some taxpayers received the standard letter a second time, while others received the nudge letter as their second notice.

The response rate for the nudge reminder was 36%, compared to 26% for the standard reminder. The percent of debt paid with the nudge was 22%, versus just 13% for the standard letter.

"We were extremely happy with the results," Skipworth says. "Not only could the department potentially collect more revenue, but from a compliance angle, taxpayers are getting the information they need."

The small business owners who received "nudge notices" from the Pennsylvania Department of Revenue showed a measurable increase in compliance.

Using Nudge to Improve Children's Health, Auto Safety, and More

The Nudge Lab is working on additional research studies across the public and private sectors.

At Boston Children's Hospital, MITRE has teamed up with the neuroscience and oncology units to try to speed up patient discharge times while accommodating their specific needs. For example, many children must go home with prescriptions or medical equipment. Some need special arrangements for school. The Nudge Lab has designed a poster that reminds parents of all the steps they must take before leaving.

MITRE researchers are also working with an auto manufacturer on airbag recall notices and with the U.S. Census Bureau to improve survey responses.

Nudging is not without controversy. Critics argue that it creates an intrusive nanny state; that it can be used in reverse to actually limit choices; and that businesses have co-opted nudge techniques for marketing purposes. The misuse of nudging even has a nickname—sludging.

"We do hear concerns about manipulation," Leets admits. "But the reason nudges work so well for public policy is because we are not trying to get anyone to change their values, beliefs or attitudes. We are not eliminating choice. All we’re doing is changing how your choice is presented."

"A nudge may not work in every context," she adds. "At MITRE we're being careful about how we apply it. And when it’s executed well, it can really benefit society at large."

by Malini Wilkes

Explore more at MITRE Focal Point: Experimentation and Research.

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