A Field Experiment on Delivery Methods for Increasing Tax Compliance
Why do people pay taxes? What are the best mechanisms for collecting outstanding tax obligations? Empirical literature has made steady progress in recent years in trying to explain what motivates individuals to pay their taxes in full and on time, and what is the best way to deal with individuals who do not declare the total amount of tax or who pay late.
There are a large number of studies based on sending different types of messages to taxpayers to identify what type of message and content generate an greater behavioral response from taxpayers. In this experiment the effect of sending the same message was evaluated but using different delivery methods, which could have a considerable impact on compliance.
First, taxpayers understand that the tax collector has a menu of options which includes cheap and impersonal alternatives that could be used to reach the universe of taxpayers, and more expensive alternatives, such as personal visits that can be used to reach a group of taxpayers. Second, the type of method the Agency uses to inform taxpayers of their outstanding liabilities and warn them of the consequences of not paying serves as a signal to taxpayers about the probability of effectively being obliged to pay. In addition, a personal visit can create behaviors that are different from the more impersonal methods due to the social forces that make people behave differently when faced with other people. Third, the probability of delivering the message effectively can differ according to the method.
With the objective of increasing tax collection and evaluate the effectiveness of different mechanisms for sending messages to taxpayers, the DIAN agreed to randomly assign the method used to contact a sample of taxpayers with outstanding debts during one of its National Collection Days. Taxpayers with relatively low debts (US$20 in PPP) or relatively high (US$46,000 in PPP) were excluded.
- Control: 6,776 taxpayers.
- Treatment 1: 5,000 taxpayers, this group was contacted by email.
- Treatment 2: 5,000 taxpayers, contacted by physical letter
- Treatment 3: 4,042 taxpayers, a group was assigned to receive a visit from a tax inspector
The randomization was done in six blocks according to the size of the debt and whether the debt was recent or not.
Payers of income, value added or wealth tax, with outstanding debts between 2011 and 2013
The aim is to “push” people to pay tax on time on the premise that “actions speak louder than words.”
Results
The results confirm what is found in the literature: sending deterrence messages has important effects on payment, and clearly shows that the method of contact with the taxpayer is important for explaining compliance. The difference between one method and another is 10 to 1: personalized visits are more effective than emails, which in turn work better than traditional mail (and much better than doing nothing). In conclusion, personalized methods perform better than impersonal methods, which is consistent with the analytical framework explained in the publication.