It is not easy for governments to get people to pay their taxes in full, and in some cases, at all.
Sanctions, fines and even prison sentences, do not constitute intrinsic motivation for complying with tax laws, which should arguably be the objective.
There are other more appealing methods, as some researchers from Tulane University in the US, and the Walter Eucken Institute in Freiburg, Germany, have been investigating.
Their comprehensive survey on current developments in tax compliance research shows that the effects of deterrence are more nuanced than initially thought. Interventions that complement sanctions can improve tax compliance.
Nudge and sludge
They start with the effects of 'nudges' that alter the ways in which the choices facing individuals are communicated to them by the tax administration.
Nudge interventions can be used to explain the benefits of taxation to society as a whole, and also appeal to taxpayers’ intrinsic motivation to pay taxes. Such nudge interventions typically do not require taxpayers to learn new skills or to exert substantial mental effort.
However, the nudge approach seems to have rather mixed effects on increasing tax compliance, suggesting that the specific design and implementation of these interventions are fundamental to their effectiveness.
Nevertheless, the authors of the study see considerable compliance-inducing potential in nudges that simplify tax-related decisions, or providing better taxpayer services such as presenting tax-related information in a more intuitive and accessible manner, or provide alternative and attractive options.
They also extend their discussion to other behavioural economics interventions that have not yet been studied widely in tax compliance research. These include reducing 'sludge', which refers to features in the tax system that make it excessively complicated.
In Germany, the tax system is particularly convoluted and complex, such that tax advisers have become a major and indispensable element of the economy. Yet, various proposals for a simplifying revamp of the tax system have not so far materialised.
Indeed, my wife and I are both self-employed and literally cannot do our taxes on our own due to the complexity of both our own work structures and the tax system in Germany.
Our tax adviser told us this years ago in no uncertain terms. Despite being well-educated, the level of knowledge and understanding required to file our taxes is beyond our capabilities.
Boosting knowledge
Another option is that of 'boosts', which target individual tax-related skills, thereby helping taxpayers to comply with legislation and make better decisions in this context.
Governments and tax authorities can invest in citizen education to improve knowledge on public finances and the functioning of tax and pension systems, that is, enhance fiscal literacy, which might also increase tax compliance.
This boosting approach requires a more long-term investment and a higher degree of mental effort and engagement on the part of the decision-maker, but is also consistent with a sludge-reducing approach.
