The $100 Million Nudge: Increasing Tax Compliance of Businesses and the Self-Employed Using a Natural Field Experiment

Abstract

This paper uses a natural field experiment to examine the effectiveness of specific nudges on tax compliance amongst firms and the self-employed in the Dominican Republic. In collaboration with the Dominican Republic's tax authority, we designed messages for more than 28,000 self-employed workers and over 56,000 firms. Leveraging administrative tax data, we find evidence that our nudges (increasing the salience of prison sentences or public disclosure of tax evaders) have large effects on increasing tax compliance, primarily working through the channel of decreasing claimed tax exemptions. Interestingly, we find that firms are more impacted than the self-employed, and that firm size is critically linked to nudge effectiveness: larger firms are considerably more influenced by nudges than smaller firms. We find this latter result noteworthy given the paucity of evidence showing significant behavioral impacts of nudges amongst the largest players in a market. Overall, our messages increased tax revenue by $193 million (roughly 0.23% of the Dominican Republic's GDP in 2018), with over $100 million constituting income that the government would not have received without our field experimental nudges.

Encouraging firms to adopt beneficial new behaviors: Lessons from a large-scale cluster-randomized field experiment

“…Our findings stand in contrast to previous work in developing economies that found a significant impact from messages directed at firms that make salient the costs of non-compliance or apply social norms (Holz et al, 2020;Kettle et al, 2016). In our context, the behavioral messages were not sufficient to cause large changes.…”

“…However, there is growing interest in how policymakers can influence firms (Leets et al, 2020;Holz et al, 2020). In contrast to recent positive findings focused on tax compliance (Leets et al, 2020;Holz et al, 2020), we find no impact of a behavioral intervention to increase the adoption of e-filing among firms and a positive but marginal impact on compliance. Our results provide, at best, muted encouragement for the use of behavioral interventions to influence firms to take-up beneficial new behaviors.…”

“…Behavioral interventions in policy have generally been targeted at individuals (Sanders, Snijders & Hallsworth, 2018). However, there is growing interest in how policymakers can influence firms (Leets et al, 2020;Holz et al, 2020). In contrast to recent positive findings focused on tax compliance (Leets et al, 2020;Holz et al, 2020), we find no impact of a behavioral intervention to increase the adoption of e-filing among firms and a positive but marginal impact on compliance.…”

“…Whilst this model has generally applied to individuals, a recent large-scale trial found an increase in the salience of negative consequences led to higher tax payments among firms (Holz et al, 2020).…”

“…From the available behavioral studies, there are indications that interventions that use simplification (Leets et al, 2020;Broughton et al, 2019, p.18;Rosenkranz et al, 2017), personalization (Algate, 2015), salience of potential penalties (Holz et al, 2020), social norms (Brahm, Lafortune & Tessada, 2016;Kettle et al, 2016), formality (Kettle et al, 2019), and a 'kitchen-sink' approach that combines multiple behavioral prompts (Brockmeyer et al, 2019;Vainre et al, 2020) can succeed in influencing the behavior of firms. These techniques are applied in areas such as improving tax compliance or increasing the take-up of government subsidies and programmes.…”