Fundamentally, the field of behavioural insights is focused on understanding human decisions and behaviours, then leveraging those insights to design practical policies and interventions. Regarding tax administration, it can be beneficially applied to a wide range of areas, from taxpayer services and enforcement to internal topics such as employee engagement and productivity. Promoting and encouraging taxpayers’ voluntary tax compliance is key to efficient tax administration. To improve effectiveness, tax administrations need to identify the need, determine the right message, and deliver the message at the right time. Pilot projects were running in Hungary in 2019 by the Ministry of Finance and the National Tax and Customs Administration (NTCA) aimed to increase this behavioural influence. The set-up of these trials and their results were published.
Among other things, new types of payment notifications were tested taking into account the best international practices and the specificities of the Hungarian tax system. It was examined how to increase the volume of voluntary payments by modifying the content or form of payment notifications. We conducted a trial, where the treatment was solely a simplification of the reminder letter sent to taxpayers with overdue tax debt. At the time of sending out the notifications, those individual entrepreneurs were involved who had a tax debt of between HUF 10 thousand and HUF 1 million. This meant a total of 21.000 taxpayers. One half of the randomly selected taxpayers received the traditional payment notice while the other half received the newly compiled one.
When designing the new letters, the main guiding principle was to prioritise the tasks of the taxpayers. Greater emphasis was placed on clear wording and using personalised content. Detailed legal references were removed with further information made available through direct links instead. The links used in the letters make it easy for taxpayers to find the booklets of the NTCA with detailed information. The form was also redesigned, and NTCA followed the principles of behavioural science (including the EAST model) to create clear and easy to follow instructions that were also clear about the consequences of non-compliance. Additionally, NTCA used colour highlighted text boxes for the layout. The following principles were considered:
- The main part on top should contain the key elements of the letter (make it easy - East), indicating:
- Who (personalization)
- What (amount to pay)
- When (specified deadline)
- How (structured communication)
- The previous experiments showed that it is important to include a specific (close) payment deadline after the due date instead of the term ‘immediately’ – the new deadline will serve as an anchor (anchoring effect) to fulfill the action demanded. (easT)
- Personalization raises engagement; Dear <name + surname> (Personalisation)
- Information needs to be well structured and simplified: simplifying communication substantially increases compliance, raising awareness (main elements: amount – deadline – account number – reference number to use) (make it easy - East)
- Colors add to the attractiveness of the letter and increase the impact.
During the planning of the project we created a unified image by dividing it into information boxes. These indicate what the taxpayer should do, where he can get help, and what sanctions he may face, if he fails to comply with the payment. During the project we applied various behavioural insights elements, principles, which are mainly reflected in these boxes, such as clear and easy- to-follow instruction, drawing the taxpayers’ attention to the consequences, etc.
The personalized part of the letter covered also in these boxes. Accordingly, the content and the structure of the information boxes depend on the particular letter, but as a general rule we followed these considerations when dividing the information:
- To-do box: clear steps with precise instructions
- Help box: The most accurate information on how the taxpayer can ask for help in case of payment difficulties or any other related subject.
- Nudge box: The contents vary depending on the nature of the message. It may include an advantage (avoiding losses), sanction (interest calculated on late payment), positive or negative consequences for the taxpayer, but it may include a brief explanation as well.If it is very short, it can even be combined with the to-do box.
The new-type notification increased the payment ratio by 1.4% on average, but the increase was even higher, 2.9%, for those with a debt of at least HUF 100 thousand. The results of the project proved that by making NTCA communication clearer, the payment of arrears, compliance with tax payment deadlines and voluntary compliance can be encouraged in a very cost-effective manner, the use of well-chosen nudges does lead to a significant increase in the number of overdue payments settled. Recovering small tax claims through enforcement means would be a significant cost to NTCA. Therefore, proper communication with the taxpayers may be particularly important in these cases. Communications with taxpayers provide an opportunity to nudge actions and simple changes to communications can increase not only the voluntary tax compliance of taxpayers, but also the good reputation of the tax administration. The experiences highlighted that it is worth to apply behavioural insights in a more permanent way in the future. NTCA is now looking to incorporate the learnings in the general process and also into the cross-border tax recovery by using bilingual payment notifications. I’m convinced that behavioural insights can make a significant qualitative difference in the work of tax administrations and transform our interactions with taxpayers, leading to increased compliance.
Katalin Kanizsai Dr.
National Tax and Customs Administration
Insolvency and Enforcement Department