Harsh enforcement threats usually work in making people pay their tax arrears. But according to a recent experimental research collaboration between the Swedish tax agency and researchers at Uppsala and Gothenburg universities, milder ‘nudge’ methods – such as including a cover letter with standard reminders and alluding to social norms – can be almost as effective.

The study finds that the most effective message for preventing people from ending up with the country’s enforcement agency contained both a brief explanation of the consequences of having the debt transferred to the enforcement agency and a reminder that most people pay their taxes due. The experiment prevented roughly 500 individuals from ending up with the agency.

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Each year, the Swedish Tax Agency sends either reminders or payment orders to delinquent taxpayers. Those who in 2016 and 2017 received a payment order, including a threat of enforcement, were 9 percentage points more likely to pay their taxes due than those who only got a standard reminder.

This was expected, but since enforcement is costly to both individuals and society, much would be gained if delinquent taxpayers could be made to pay their tax debt by milder methods. An experiment was therefore conducted in 2018, where the standard reminders and payment orders were accompanied by one of four different cover letters.

It turned out that just adding a cover letter without any additional information to the standard reminder increased the payment rate by as much as 7 percentage points – that is, almost as much as the harsh threat of enforcement. In addition, including a message alluding to social norms or giving a simple explanation of the consequences of enforcement further increased the likelihood of payment.

In Sweden, unpaid tax debt of a certain magnitude is transferred to a body known as the Enforcement Agency. Having outstanding debt with the Enforcement Agency comes with social stigma, is financially costly and limits an individual’s access to credit.

The most effective message in preventing people from ending up with the Enforcement Agency contained both a brief explanation of the consequences of having the debt transferred to the Enforcement Agency and a reminder that most people pay their taxes due.

The experiment prevented roughly 500 individuals from ending up with the Enforcement Agency. Up-scaling this could reduce the number of people at the Enforcement Agency by more than 4 percentage points.

One conclusion from the experiment is that salience is important for making people act. Although not all cover letters gave any concrete information, they all had the text ‘Important message’ in the letterhead, which probably caught people’s attention more effectively than standard letters from the tax agency.

As a result of the study, the Swedish tax agency has now initiated a review of the formulation of their reminders so as to make them clearer and more salient.

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‘Nudges and Threats: Soft vs Hard Incentives for Tax Compliance’

Authors:

Henrik Andersson (Uppsala University)

Per Engström (Uppsala University)

Katarina Nordblom (University of Gothenburg)

Susanna Wanander (Swedish Tax Agency)