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.

Understanding the spread ofCOVID‐19 misinformation on social media: The effects of topics and a political leader's nudge

“…Another phenomenon related to heuristic processing is “nudge”—the indirect yet deliberate move to alter people's choices or make people more subject to heuristic processing (Saghai, 2013 ; Schmidt, 2017 ; Thaler & Sunstein, 2009 ). Even though nudges usually occur in subtle and often unnoticeable ways, they have been effective in promoting individual behaviors such as those in taxation (Holz et al, 2020 ), education (Benhassine et al, 2015 ), healthcare (Blumenthal‐Barby & Burroughs, 2012 ), and marketing (Tan et al, 2018 ). Specifically, nudges can influence people's behaviors through two types of heuristics: familiarity heuristics and consensus heuristics.…”

Honesty nudges: Effect varies with content but not with timing

“…In the treatment Nudge MD in R6, we add the same sentences in present tense. Deterrence messages used in letters to taxpayers stress the risk of detection (e.g., Dwenger et al, 2016;Bott et al, 2020) or emphasize the potential consequences of non-compliance (see, e.g., Fellner et al, 2013;Holz et al, 2020). To our knowledge, we are the first to exploit the possibility of making comparisons to chance to deter cheating (see Sections 1 and 5 for applications).…”

Moral Constraints, Social Norm Enforcement, and Strategic Default in Weak and Strong Economic Conditions

“…Previous studies have examined the presence of credit registries (Brown and Zehnder, 2007), the strengths of legal contract enforcement (Fehr and Zehnder, 2009) or the ability to exclude misbehaving borrowers from the current source of income (Brown and Serra-Garcia, 2016). Holz et al, 2020;Kirchgaessner, 2010;Tyler, 2006). 5 While most of the existing literature studies tax evasion in static economic environments (see, e.g., Slemrod, 2019, for a review) our experiment sheds light on variation in tax evasion across economic conditions.…”