One Size Does Not Fit All: A Field Experiment on the Drivers of Tax Compliance and Delivery Methods in Rwanda

Abstract

This is an Open Access paper distributed under the terms of the Creative Commons Attribution Non Commercial 4.0 International license, which permits downloading and sharing provided the original authors and source are credited -but the work is not used for commercial purposes. http://creativecommons.org/licenses/by-nc/4.0/legalcode SummaryAlthough field experiments in tax compliance represent a growing area of research, the literature has so far focussed exclusively on high and middle-income countries. This paper starts to fill this gap by reporting the results of a tax field experiment in Rwanda, while also highlighting some characteristics that may be common to other low-income countries. We evaluate an intervention carried out by the Rwanda Revenue Authority (RRA), which involved sending messages to taxpayers to nudge their declaration behaviour during the filing period of January-March 2016. Focussing particularly on business profits tax, our study is designed to address two interrelated questions. First, what are the key drivers of compliance in Rwanda? Second, what is the best delivery method to reach taxpayers with messages designed to improve compliance? Although other studies have explored delivery methods in the context of taxpayer communication, our study is the first one to interact these methods with different message contents. As a result, we evaluate a set of nine treatments that combine three message contents (deterrence, fiscal exchange, reminders) and three delivery methods (letters, SMS, emails) -as compared to a control group that received no message. We find that friendly approaches to taxpayers are generally more effective than deterrence. However, small taxpayers are still quite responsive to the possibility of being fined and prosecuted (deterrence). We also show that low-cost delivery methods like SMS and emails can be highly effective as compared to letters.

From the Lab to the Field: A Review of Tax Experiments

“…Further evidence on fiscal exchange comes from a recent field experiment from Rwanda (Mascagni et al ., ). In this context, as in low‐ and middle‐income countries more generally, non‐compliance with the treatment is a greater concern because taxpayer registries are often incomplete or not kept up to date .…”

“…This was done in a recent study, where the same messages were delivered through three delivery methods (Mascagni et al, ). This study, reviewed in more detail in section , shows that non traditional delivery methods like emails and SMS can be highly effective compared to letters in low‐income countries.…”

Nudging for Tax Compliance: A Meta-Analysis

“…Other non-deterrence nudges: The second sub-category of non-deterrence nudges mainly contains manipulations that are utilized "to correct" the taxpayer non-compliance that stems from such behavioral fallacies as limited attention, procrastination and cognitive overload among others. For instance, simple reminders are sent to taxpayers to overcome the problem of limited attention (Hernandez et al 2017, Mascagni et al 2017. The problem of cognitive overload is usually bypassed through the simplification of the communication language, the introduction of visual stimuli or provision of information how to file the income (De Neve et al 2019, Eerola et al 2019.…”

Innovations in Tax Compliance: Conceptual Framework

“…As noted above, an experiment in Rwanda found that letters to taxpayers stressing the connections between taxes and services were generally at least as effective as enforcement threats in increasing compliance. 141 Still, communication-based interventions may have a limited ceiling, or diminishing returns. Telling taxpayers about the link between tax payments and public services is unlikely to be a substitute for actual improvements in public services in a context where citizens are generally dissatisfied.…”