Presentations – Keith Walsh

Research & Analytics BranchDATA - INFORMATION - KNOWLEDGE

Understanding and Influencing Taxpayer Behaviour

Keith Walsh,Economist, Research & Analytics Branch, Revenue

19th June 2013

Outline

• Role of Revenue

• Why does understanding behaviour matter?

• Why do people pay tax?

• Irish evidence on taxpayer behaviour

• Putting theory into practice

Revenue’s Role

• Administration of the tax and customs regimeso Assessmento Collectiono Debt managemento Audit and other interventionso Anti-smuggling and other customs controlso Anti-avoidanceo Policy advice and legislative supporto EU tax policy, treaty networks and international liaisons

• Constantly reviewing these functions and the environment in which they operate

• Strong contribution to the formulation and design of administrable tax policy

Behavioural Economics and Taxation

• Behavioural economics o Brings insights from psychology into economics to better

understand how people make decisions

• Application to taxation?o Most of the tax related literature focuses on policy areaso But has great potential to improve tax administration

Behavioural Economics and Taxation

• Why does it matter?o Taxation in Ireland is largely based on voluntary

compliance and self-assessmento Tools like audit are effective but expensive o Targeted treatments based on behavioural insights may

be more efficient

• Prevention of errors allows tax administration to focus on deliberate non-compliance

• Potential gains go beyond improving the efficiency of the tax administration

o Lowering administrative and compliance costs

Tax Compliance

• Compliance is the key objective of tax administration

o Filing compliance (filing returns on time)o Reporting compliance (reporting the correct income) o Payment compliance (paying amounts due on time)

• Key behavioural research questiono Why are taxpayers compliant?

Why are Taxpayers Compliant?

1. Deterrence

2. Norms (personal and social)

3. Fairness & trust

4. Simplicity / complexity

5. Broader economic, political and social issues

• Influence of the tax administration?

Attitudes and Behaviour in Ireland

• What do we know about the determinants of taxpayer behaviour in Ireland?

• Revenue surveyso Two surveys of SMEs (2006, 2008)o Two surveys of employees (2007, 2009/10)o All published on www.revenue.ie

• Information on contacts, satisfaction and factors that influence compliance

Survey Conclusions

• Deterrence remains important, as does fairness

• Personal norm related responses are strong from a compliance perspective

• Many respondents have positive personal beliefs but the level that say the same beliefs are widespread in society is lower

• Suggestions that tax avoidance and customs / excise issues are seen are less unacceptable than tax evasion to some respondents

• Some categories of taxpayer have only limited opportunities for evasion (e.g., PAYE)

Changing Culture in Tax Administration

• Seeking to influence taxpayer behaviour is not a new concept for tax administrations

• What is new?o An increased focus on the links between understanding

taxpayer behaviour and developing risk treatment strategies

• Tax administrations are putting behavioural insights into practice

o OECD Forum on Tax Administrationo Sweden “Right from the Start”o Netherlands “Horizontal Monitoring”o UK Behavioural Insights Team

Direct Interventions

• Evidence-Based Experiments o Coleman (1996, 2007) in Minnesota

Wording of letters to taxpayers before return deadlineo Wenzel (2001a, 2001b) in Australia

Impacts of norms and perceptions on complianceo Hasseldine et al. (2007) in the UK

Wording of letters to taxpayers before return deadlineo Appelgren (2008) in Sweden

Wording of letters to taxpayers before return deadlineo Ariel (2012) in Israel

Wording of letters to companies before return deadlineo Chetty and Saez (2009) in the US

Effect of personalised information on tax credit entitlementso Behavioural Insight Team (2011, 2012) in the UK

What is Revenue Doing?

• Constantly reviewing compliance burden on business

• Burden reduction lowers costs for business

• €85m savings in administration costso Reduced filing frequencies for VAT, Employers’ PAYE/PRSI

and Relevant Contracts Tax o An increase in the VAT registration threshold o Pre-population of IT and CT return forms o Revenue’s new electronic Relevant Contracts Tax system

What is Revenue Doing?

• Building on academic behavioural research

• Building our knowledge of taxpayer behaviouro Past Revenue experienceo Continuing taxpayer surveyso Segmentation of taxpayer population(s)

• Experiences from other countries

What is Revenue Doing?

• Wide use of withholding arrangements and increasing sources of third party data

• Behavioural insights have informed new communications strategy

• Testing different approaches to how we communicate and intervene with taxpayers

o Evaluation using experimental or semi-experimental methods where possible

• Two examples of randomised controlled trials

Publican Licences

• Renewal letters to all publicans issue in September

• Treatment group (400)o Randomly selected to receive a revised renewal lettero Small changes to the letter and a message included on

social norms of behaviour among publicans

• Control group (7,800)o Remainder of publicans received standard renewal letter

• Target: improve renewal rates and timing

Publican Licences

Timing of Licence Renewals

0%

20%

40%

60%

80%

100%

01/1

0/11

16/1

0/11

31/1

0/11

15/1

1/11

30/1

1/11

15/1

2/11

30/1

2/11

14/0

1/12

29/0

1/12

13/0

2/12

28/0

2/12

14/0

3/12

29/0

3/12

13/0

4/12

28/0

4/12

13/0

5/12

28/0

5/12

12/0

6/12

27/0

6/12

12/0

7/12

27/0

7/12

11/0

8/12

26/0

8/12

10/0

9/12

25/0

9/12

Treatment Control

Renewal rates 1st Oct: Control 29.4%, Treatment: 35.5%

Publican Licences

• September / October 2011o Only difference between the groups is the treatment letter

• Post October 2011o Series of further interventions on treatment group

• Statistical testingo October and post-October differences are significant

• September 2012o Revised letter for all publican’s licence holders o Licence renewal rate on 1st October 2012 is 38%

• Only 6 percentage point increase?

Tax Arrears

• Cases with small arrears, recently incurred

• Random selection of 500 debt management caseso 200 in treatment group 1 – standard lettero 200 in treatment group 2 – softer lettero 100 in control group – no letter (until after project)

• Target: improve management of arrearso Payment, part-payment, liability reduced or instalment

arrangement agreed

Tax Arrears

0%

20%

40%

60%

80%

Standard Soft Control

Part- Paid

Paid

Other

Liability Reduced

Instalment

Contact Only

VAT cases with arrears

Tax Arrears

0%

20%

40%

60%

80%

Standard Soft Control

Part- Paid

Paid

Other

Liability Reduced

Instalment

Contact Only

Income tax cases with arrears

Conclusion

• Increasing focus on behavioural insights for tax administration

• Testing, measuring, learning from experience

• Even small changes in communications do influence compliance behaviour

• Benefits from improvements in tax administration go beyond just efficiency and effectiveness gains

Thank you

keithw@revenue.ie

“Understanding Taxpayer Behaviour – New Opportunities for Tax Administration”, Economic & Social Review, Vol. 43(3)

www.esr.ie