Improving Tax Compliance without Increasing Revenue: Evidence from Population-Wide Randomized Controlled Trials in Papua New Guinea

Christopher Hoy,Luke Mckenzie,Mathias Sinning

doi:10.1596/1813-9450-9539

Abstract

This paper studies the impact of “nudges” on taxpayers with varying tax compliance histories in Papua New Guinea. We present the results from two population-wide randomized controlled trials in a setting that is characterized by low compliance rates and a lack of effective enforcement. We test the impact of text messages, flyers and emails that remind taxpayers of declaration due dates and provide information about the public benefits from paying tax. We find that the treatments increased the number of tax declarations filed without increasing the amount of tax paid because the taxpayers who responded to the nudges were largely exempt from paying tax. This result is consistent across tax types, communication channels and time periods. We also find that the treatments had no impact on previously non-filing taxpayers. Collectively, our results illustrate that taxpayers who face the lowest cost from complying are most likely to respond to a nudge.

Highlights

Tax as a share of GDP and levels of tax compliance are substantially lower in the poorest countries in the world (Besley and Persson, 2014; Slemrod, 2019; Brockmeyer et al, 2019)
To be able to meaningfully increase revenue, nudges would have to be able to have a positive impact on taxpayers who face a high cost from complying. This raises the question as to which types of taxpayers respond to credible, non-deterrence nudges in low- and lower-middle-income countries and whether these messages are an effective way to raise revenue. We examine this issue by conducting two population-wide randomized controlled trials involving all firms registered to pay Salaries and Wages Tax (SWT) and Value Added Tax (VAT) in Papua New Guinea (PNG)
We extend existing theory (Allingham and Sandmo, 1972; Slemrod, 2019) by introducing transaction costs into a simple model of tax compliance and theorize that nudges will have dramatically different effects on taxpayers depending on their compliance history

Summary

Introduction

Tax as a share of GDP and levels of tax compliance are substantially lower in the poorest countries in the world (Besley and Persson, 2014; Slemrod, 2019; Brockmeyer et al, 2019). Governments have begun exploring alternative, non-deterrence approaches to encourage taxpayers to comply, such as by providing them with information that tax revenue funds public goods and services (Antinyan and Asatryan, 2019; Mascagni, 2018). The impacts of these “nudges” are likely to be inversely related to the cost taxpayers face from complying, especially when enforcement is weak as they may believe they can avoid being punished for non-compliance (Gordon and Li, 2009). This raises the question as to which types of taxpayers respond to credible, non-deterrence nudges in low- and lower-middle-income countries and whether these messages are an effective way to raise revenue

Methods

Results

Conclusion