Key message 3 – Harnessing social incentives may increase compliance
Standard tax compliance models focus on enforcement. They assume the main motivation citizens have to pay their taxes is the fear of being caught for non-payment or fraud. In developing countries, however, threats to catching tax evaders are much less credible. This raises the question of why citizens in developing countries pay taxes at all, given that the probability of being caught and punished for tax evasion is so low.
Citizens’ ‘tax morale’ – their personal willingness to pay taxes – may explain low compliance rates when enforcement is weak.
Bangladesh’s taxpayer recognition programme
The National Board of Revenue (NBR) in Bangladesh implemented several innovative programmes aimed at exploiting social incentives and peer-recognition to improve firm tax compliance. Collaborating with IGC researchers, NBR conducted a randomised field experiment to rigorously evaluate these programmes. In neighbourhoods where some firms were already tax compliant, the threat of exposing firms’ tax payment behaviour encouraged non-complying firms to start paying taxes. In neighbourhoods using social incentives, firms were up to 6 percentage points more likely to make VAT payments; total tax revenues paid increased by 17% (Chetty et al., 2014).
Universities and charities regularly leverage public interest and social recognition to generate funds (e.g. naming exhibits or buildings after donors). Similar approaches can work for tax collection. Exposing information about firms’ tax compliance to peers or the public – in effect shaming non-compliers and rewarding compliers – can alter firm behaviour. If recognition is cheap and firms find it valuable, such programmes may cost-effectively raise revenues.
Public finance research suggests that citizens’ ‘tax morale’ – their personal willingness to pay taxes – may explain low compliance when enforcement is weak. Tax morale is based on the idea that psychological factors such as intrinsic motivation or an individual’s civic mindedness, social norms, reciprocity, and cultural values of trust and belief in government all play a significant role in encouraging citizens to pay their taxes. These factors are detailed below:
- Intrinsic motivation. Citizens believe that paying taxes is the correct thing to do.
- Social norms. Citizens recognise that others in their social group pay taxes, and so fear being ostracised if they do not pay their own.
- Reciprocity. Citizens pay their taxes because they receive something in return from the government, such as social security support or public services (transport, education, healthcare, sanitation etc.).
- Culture. Cultural values (level of trust in government, political views, etc.) compel citizens to pay taxes.
Tax morale appears to be an important driver of citizens’ willingness to pay taxes, but rigorous evidence for how policymakers can raise intrinsic motivation and tax compliance remains relatively scarce. Further research and experimentation is needed to identify how to stimulate intrinsic motivation to comply with taxes, especially in settings with limited tax enforcement capacity. Emerging research focuses on whether linking taxes to service delivery outcomes could improve compliance. For instance, policies that provide incentives to pay taxes could boost tax morale, supplementing or substituting traditional approaches to improving compliance, such as penalties for evasion.