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Nudge Strategies for Tax Compliance: A Practical Guide from Canada Revenue Agency

Explore the implementation of nudge strategies for improving tax compliance, with case studies from the Canada Revenue Agency (CRA) and international tax administrations. Learn about the psychology behind effective nudges, see examples of successful initiatives, and access a step-by-step guide for designing and testing nudge interventions. Discover how these strategies can lead to increased voluntary compliance, simplified processes, and positive taxpayer attitudes towards tax authorities.

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Nudge Strategies for Tax Compliance: A Practical Guide from Canada Revenue Agency

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  1. Nudge enablers at the Canada Revenue Agency Nudge workshop July 22, 2014

  2. Presentation overview • What is nudge? • Nudge application in international tax administrations • Nudge initiatives at the Canada Revenue Agency (CRA) • Step-by-step guide to nudge

  3. What is nudge? • A policy intervention aimed at changing economic behaviour • Targets the decision-making environment • A cost-effective way to facilitate voluntary compliance + PSYCHOLOGY

  4. Effective nudge characteristics • Simple information • Easy process • Positive focus • Presents options • Highlight the ‘best’ option • Uses social norms • Highlights benefits of desired behaviour

  5. UK government: Social norms and timely filing • UK

  6. 8% 6.8% 6% 4.3% 4% 2% Increased debt Unpaid 0% Paid in part or in full Entered payment arrangement -2% -2.6% -4% -4.2% -6% Australian government: Debt correspondence • Objective: Appeal to taxpayers’ psychological drivers to increase and maintain debt compliance • Method: Mailed altered version of previous letter; updated content and format with nudge techniques • Results: Increased compliance, decreased non-compliance compared to previous letter Compliance behaviours compared to control group

  7. CRA: ‘Get it in Writing’ Campaign

  8. CRA: Automatic Dialing Announcing Device (ADAD) • Objective: Increase filing compliance by reminding taxpayers of deadlines • Method: Delivered automated messages to new payroll and GST/HST registrants that informed them of their filing and/or remitting deadlines • Results: Increased filing compliance by taxpayers contacted through ADAD, compared to those not contacted

  9. CRA: Tax-Free Savings Account (TFSA) – approach under development • Objective: Encourage voluntary removal of 2013 TFSA over-contributions and increase future compliance with TFSA rules • Method: Mail non-compliers altered nudge versions of previous communication material • Specific nudge techniques used: • Compliance social norm • Simplified information and rules • Less text • Bullets and short sentences • Less complicated wording

  10. Nudge Initiative components Develop step-by-step guide to nudge Recruit behavioural scientists Partner with academics

  11. Step-by-step Guide to nudge • Determine the appropriateness of nudge approach • Select and test a suitable nudge intervention • Measure results and make recommendations • Full implementation of nudge intervention

  12. Step 1: Appropriateness of nudge • Key considerations: • Objective • Target population • Examples: • Scenario 1: Business owners from a sector known to be part of the underground economy significantly underreported their income. • Scenario 2: Taxpayers late-filed their tax return for the past 2 years. X

  13. Step 1 continued • When is nudge most likely to increase compliance?

  14. Step 2: Select and test nudge • Review literature • Consult the experts • Determine experimental design • Develop nudge materials • Understand project constraints/restrictions • Test effectiveness • Focus groups, pre-implementation experiment Feasible agency approach Ideal research design

  15. Step 3: Measure results, make recommendations • Before full implementation, measure and validate selected nudge approach through sample populations and experiments • Create business case • Always good practice to use control groups from target population, especially when pretesting is not an option Form solid evidence base: Does the nudge approach have a strong chance of success? Expected results: To what extent will Nudge work? What is the expected return on investment? Measure effectiveness: Did the nudge intervention facilitate the desired behavioural outcome? By how much?

  16. Step 4: Full implementation • Track progress • Measure success • Return on investments • After 1 year or 2, go back to step 3 • Determine long-term effectiveness • Make recommendations for extension to other populations

  17. Benefits of nudge approach to compliance • More complete picture of compliance issues • Targeted approach for specific populations • Simplifies complex processes/difficult decisions • Promotes positive attitudes toward CRA • Voluntary instead of forced compliance (less intrusive) • Cost effective Attitudes, cognitions, environment, norms, decision-making context Compliance

  18. Where do we start? • Start small and prove nudge works Timeframe for Results Move to e-services Desired result: Increase direct deposits Change in filing behaviour Desired result: Restore regular filing activity Taxpayer owes money Desired result: Payment is received New tax credit results in high volume of enquiries Desired result: Decrease in phone enquiries Complexity

  19. Thank youJean-Francois.Ruel@cra-arc.gc.ca

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