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Behavioural InsightsInsights forfor BetterBetter TaxTax Administration:Administration:BehaviouralBrief GuideGuideAA BriefA Short Background to Behavioural InsightsThe explosion of behavioural insights in the 21st century reflects a shifting paradigm that accounts for, rather than ignores, humanity’stendencies toward illogicality. Several current government systems – from tax administration to criminal justice to public policy writlarge – were predicated on an assumption of human rationality. That changed with the cognitive revolution in the mid-twentiethcentury, which introduced and expanded on the idea that people frequently act in predictably irrational ways (to borrow a phrasefrom well-known psychologist Dan Ariely).Cognitive psychology, behavioural economics, and many other fields converge to inform behavioural insights – the term firstdeveloped by the UK’s Behavioural Insights Team in 2010. Since then, behavioural insights have been successfully applied toa wide range of topics, including healthcare, social policies, personal finances and, of course, tax administration. Behaviouralinsights units apply modern understandings of human behavior to design effective policies and interventions. Furthermore, theyuse analytics and experiments to uncover new insights and provide a strong evidence base from which senior leaders can basestrategies.Accordingto a 2020Forum on TaxAdministrationsurvey, aroundone third of FTAmembers areusing behaviouralinsights to meettheir missions.What Are Behavioural Insights?Early economic models suggested that individuals make logical decisions on tax compliance based on the calculated costs and benefits to themselves. From thisbelief emerged traditional strategies to fight tax noncompliance: tax inspections, sanctions, and heavy fines. However, research in psychology and related disciplineshas revealed additional factors that could motivate or deter behavior. Behavioural insights distills those findings and focuses them towards real-world applications.Behavioural insights are fundamentally about understanding decisions and behaviours—including the less logical and irrational ones—and leveraging thatunderstanding to design practical policies and interventions. This has led to important modifications to traditional methods, such as guiding behaviour via thearchitecture of systems or the presentation of choices.It can be helpful to consider peoples’ behaviours through a framework of individual factors, environmental factors and social factors. The following includes extractsfrom the United States’ Internal Revenue Service (IRS) Behavioural Insights Toolkit, as well as some additional examples:Behavioural insights are fundamentally about understanding decisionsand behaviours—and leveraging that understanding to design practicalpolicies and interventions.33

Behavioural Insights for Better Tax Administration:A Brief GuideIndividual Factors: People are faced with more decisions and information than we can consciously process.Research from the cognitive sciences explains that we process information in two ways: 1) in an automatic fashion, without much conscious thought;or 2) using deliberate, logical thought. Most of our behaviour stems from the former; it is fast and automatic, relying on a myriad of cognitive shortcutsin order to reserve our limited ability to deeply process information for the most salient, non-routine, or novel situations.Examples of Individual FactorsLoss Aversion. Humans show strong responses to scenarios framed aslosses. In one study, 84 percent of doctors chose to recommend surgery.when told that “The one-month survival rate [for this surgery] is 90%.” Thisdropped to 50 percent when doctors were given a choice framed as aloss, stating that “There is a 10% mortality in the first month.”9 Continuedresearch showed that the amount of a possible gain needed to be at leastdouble what could be lost.Cognitive Load. Being presented with too much information at once canbe overwhelming, leading to suboptimal, potentially impulsive decisionsor inaction. Several studies have shown that having a greater degreeof choice can be demotivating -- Take the classic example of the JamExperiment, which showed that when presented with too many options(24 flavors of jam or chocolates), consumers were less likely to buya product than when they had fewer options (6 flavors). Not only wereconsumers with fewer choices more likely to buy a product, they werealso more satisfied with their choice.10Social Factors: Humans are social beings who care what others think and do.Humans by nature are social creatures. We go to great lengths to match our behaviour to those around us, particularly if we respect them orwant to belong to their social group. We try to present a positive image of ourselves, especially when we believe others are watching.Examples of Social FactorsReciprocity. There is a social norm to return favours. People feel a sense ofobligation toward those who have done something for them. For example,you might feel obliged to offer early feedback on a presentation to someonewho had previously done so for you. Providing fair treatment and highlightingextra effort from the tax administration to help the taxpayer may encourageadditional effort from the taxpayer to ensure they provide honest, accurateinformation.Messenger Effects. The entity delivering a message is important – a trustedauthority on a subject is more likely to be believed than a random person onthe street. A source with an established relationship to an audience can beleveraged for greater impact. For example, engaging community partners inan outreach campaign can prompt more people to pay attention and act oninformation.4

Behavioural Insights for Better Tax Administration:A Brief GuideEnvironmental Factors: Much of our behaviour is unconscious and in response to our surroundings.Because we rely so heavily on our automatic processing system, our actions and decisions are often influenced by ourenvironment – both our physical surroundings and things like advertising or elements of a task at hand (e.g., a multitude ofpop-up ads distracting from an interesting article or, on the other end of the spectrum, the thoughtful design of an easilycompleted form).Examples of Environmental FactorsSalience. Prominent, conspicuous items capture attention more readilythan more mundane things. Something could be conspicuous for personalreasons – say you just bought a new watch and now identify the samemodel on several strangers where you previously never noticed suchthings. Salience can also be crafted. News coverage can draw attentionto enforcement actions, making those deterrents more salient to potentiallysimilar taxpayers. Instructions for tax forms can be reworked to guide thereader to the most important features.Choice Architecture. The physical presentation and order of optionsmatters. Someone entering a cafeteria with a beautiful, prominently displayedarrangement of healthy options is more likely to choose a nutritious mealthan someone entering to a display of fried foods and decadent desserts.Interconnection: Individual, environmental, and social factors can mutually influence each other.The above framework highlights how our peers, cognitions and environment can all shape our choices and actions (or lack thereof). The pieces of this framework aretightly interconnected. Individual factors can influence what social and environmental factors we attend to and vice versa – in short, human behaviour is multifaceted.For instance, social norms may exert pressure to conform to a given standard, but only if that standard is shared by a salient, personally-important group.5

Behavioural Insights for Better Tax Administration:A Brief GuideApplications for Tax AdministrationTax administrations have dedicated considerable resources toward achievingtaxpayer compliance, but they may have reached a limit of what is possiblewithout a deeper consideration of root causes. Identifying what influencescompliance and noncompliance provides more options for effectively interactingwith taxpayers. Behavioural science offers a set of tools to identify and shapethose influences, helping to further modernise tax administration. In a growingnumber of administrations, behavioural scientists are investigating how best toenact change by targeting general taxpayer behaviours, as well as by tailoringinterventions for individuals and specific taxpayer segments. Their investigationsare experimental in nature and informed by behavioural principles.Successful strategies and interventions are not a matter of guesswork or gutfeelings; they require experimentation and analysis. The bottom line is that humanbehaviour is complex and context matters. What works in some situations orwith certain taxpayers may not work with others. Making assumptions aboutwhat drives behaviours is of little value if not informed by evidence or subjectedto meaningful dialogue and open questioning. What might intuitively seem tobe an effective compliance approach – for example, increasing sanctions orincreasing auditing – might on their own be counter-productive strategies,engendering distrust and less compliant behaviour over time. The methodsused to understand behavioural responses and test interventions to changebehaviours can build confidence in policies and procedures. They also providefoundations for evidence-based decision-making.How Behavioural Insights Can Help Tax AdministrationIn concrete terms, behavioural insights can help:Through a process of: Improve tax compliance behaviours Understanding behaviours and what drives them Change service behaviours Designing policies or other interventions to change behaviours Encourage productive employee behaviours Providing evidence on the most effective ways to achieve change6

Behavioural Insights for Better Tax Administration:A Brief GuideMethods used by behavioural scientists are responsive to the burgeoningcalls for data-driven, evidence-based decision making. Conducting pilotexperiments and testing interventions are important for determining what impactan intervention may have in a given context. Tests will not always producedesired results; this is a natural part of the experimentation process and shouldnot deter testing. So-called “failed” experiments teach us what does not work(or works differently than anticipated) and are just as important as successfulexperiments. These may help tax administrations avoid costly investments inineffective approaches or avoid approaches that may unintentionally increaseundesired behaviour. Additionally, tests may also reveal positive outcomesoutside of the expected behaviour change. For example, a reminder to file mayalso prompt sign-up for digital service channels. Human behaviours evolveover time and may require strategies to evolve with them. This also underliesthe importance of continued testing and evaluation.Methods Matter: Behavioural Insights for ConfidentDecision MakingBehavioural scientists generally use carefully crafted experimental methodsto derive insights and provide evidence of what works. Having a relevantcomparison group allows for a clear measure of intervention effectiveness. Onecommon approach – the randomised controlled trial – uses random assignmentto create two or more groups drawn from one larger population. By selectingparticipants into groups at random, researchers are able to limit the possibilityof external factors influencing the outcomes. That is, an experimental designassures researchers that the results reflect a true effect of the intervention(e.g., receiving a letter, being audited) as opposed to some other factor. Seniorleaders can be confident when making determinations based on evidence fromwell-designed experiments.Sometimes randomised controlled trials are not feasible due to financial,logistical, or political factors. In these instances, quasi-experimental designsmay be an alternative method for generating evidence. While there are manyvariations of these designs, selection for treatment (for instance, receivinga letter or being audited) is not random. In one approach, a researcher maycreate a comparison group with similar characteristics as the treated group.Comparing these two groups provides a stronger understanding of outcomesthan assessing changes in the treated group alone. In general, the lack ofrandom assignment can reduce the ability of these methods to measure thetrue impact of a policy or treatment on behaviour. However, they can producecredible evidence with the use of appropriate statistical techniques.SampleGroup 1No interventionNo change intax complianceRandomisationExperiments involving fewer people than a typical randomised control fieldtrial may be another viable alternative. In these, smaller groups of people maybe invited to try a new digital prototype or respond to hypothetical scenarioswith a proposed intervention. Without a representative sample, you may notbe able to accurately say how the broader population will respond. However,such studies are often able to provide a deeper understanding of potential rootcauses because they provide a means for researchers to ask taxpayers abouttheir thought processes and identify any barriers.Group 2InterventionIncrease intax complianceDecrease in taxcompliance7

Behavioural Insights for Better Tax Administration:A Brief GuideFrom Behaviour to Change: The Strategic Application ofBehavioural InsightsOptimal strategies also may need to consider whether the why varies for differentpopulation segments. This will help determine when to choose systemicinterventions (applied to an entire population) or segmented interventions(applied to specific groups within a population). Consider a scenario where twotaxpayers have unpaid taxes. Past behaviours show one is routinely timely andthe other, routinely untimely. One may procrastinate and benefit from regularreminders. The other may have experienced an unexpected hardship and beeligible for relief. This is the type of scenario that may benefit from a tailored,segmented intervention.Behavioural interventions often involve removing frictions that hinder desiredactions (e.g., reducing steps for taxpayers), prompting reconsideration beforesubmitting undesired actions (e.g., adding steps for potential inaccuracies),and providing nudges that encourage desired behaviour. Determining theappropriate intervention will need to consider what’s driving behaviours as wellas what interventions may be technically feasible in a given context.To effectively change behaviours, we need to understand why people act theway they do. For example, different strategies may need to be deployed whensomeone is making a rational choice versus when actions are less deliberate.Designing a system of penalties to discourage behaviours may work when ataxpayer is making a rational choice about non-compliance, but is likely to beless effective at curtailing non-compliant behaviour resulting from other factors– for example, unintentional math errors.8

Behavioural Insights for Better Tax Administration:A Brief GuideAwareness / AttentionDo people know whatthey need to do?EnactmentComprehension / PersuasionDo they followthrough on theirintentions?Do they understandthe risks andrewards?Are they payingattention?Do they think othersactually do this? Reduce or eliminate stepsAre they makingunintentional errors? Change defaults (e.g., opt outinstead of opt in, or option topre-set/automate recurringactions)Credibility / PersuasionDo they believe thattheir noncompliancewill be detected?Will sanctions havea noticeable impact?Do they believesanctions will beenforced? Help taxpayers commit toa plan Provide peer comparisonshighlighting high compliance Personalise communicationswith taxpayer-specific historyand consequences of inaction Provide short, clear reminders Simplify text and use designelements to bring attention tokey information Increase detection capabilitiesand visibility of enforcement,such as through media coverage Follow through on deterrencemessages Add salient prompts to directattention or point out potentialerrors. Adjust penalties or sanctions Leverage external partners ormedia to raise awareness9

Behavioural Insights for Better Tax Administration:A Brief GuideApplying a Broader Lens: Behavioural Insights Across the Value ChainTraditional interventions are often reactive, focusing on how to encourage a corrective action after an issue has occurred. Proactive consideration of behaviouralinsights can suggest where choices or the need to act might be nudged, limited, or removed entirely to achieve compliance up front, including through possiblepolicy changes. Reviewing tax administrations’ strategies with a behavioural lens can identify opportunities for upstream, proactive vities andeliminatingopportunities fornoncompliance andneed for assistanceAssistingcustomers withinformationservices when theyneed itModifyingresourse-intensivemeasures to collectdebts or correcterrorsProactiveReactive10

Behavioural Insights for Better Tax Administration:A Brief GuideDigitalisation as an Accelerator for Behavioural InsightsDigitalisation can serve as an amplifier in behavioural change. Modern technology enables the efficient capture of data, ranging from third-party reporting totax filings to service interactions – such a

century, which introduced and expanded on the idea that people frequently act in predictably irrational ways (to borrow a phrase from well-known psychologist Dan Ariely). Cognitive psychology, behavioural economics, and many other fields converge to inform behavioural insights - the term first