Nudge enablers at the Canada Revenue Agency

Nudge workshopJuly 22, 2014

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What is nudge?

Nudge application in international tax administrations

Nudge initiatives at the Canada Revenue Agency (CRA)

Step-by-step guide to nudge

Presentation overview

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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

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Effective nudge characteristics Simple information

Easy process

Positive focus

Presents options• Highlight the ‘best’ option

Uses social norms

Highlights benefits of desired behaviour4

UK government: Social norms and timely filing

UK

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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

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4.3%

6.8%

-2.6%

-4.2%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Entered payment

arrangement

Paid in part

or in full

UnpaidIncreased

debt

Compliance behaviours compared to control group

CRA: ‘Get it in Writing’ Campaign

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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 8

Payroll GST/HST0%

10%

20%

30%

40%

50%

60%

70%

39%

56%

43%

61%

Filing compliance for new payroll and GST/HST registrantsNo ADAD ADAD

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

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Nudge Initiative components

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Develop step-by-step

guide to nudge

Recruit behavioural scientists

Partner with academics

Step-by-step Guide to nudge

1. Determine the appropriateness of nudge approach

2. Select and test a suitable nudge intervention

3. Measure results and make recommendations

4. Full implementation of nudge intervention

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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.

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X

When is nudge most likely to increase compliance?

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Step 1 continued

Unsuitable Suitable

The problem stems from:

• Strong negative attitudes toward the CRA or taxation in general

• Low risk aversion

• Lack of concern with consequences of getting caught

• Perception that cheating on taxes is ‘not a big deal’

• Strong social norm of cheating taxes in their ‘group’ (e.g., business sector, community, etc.)

The problem stems from:

• Genuine error

• Misunderstanding the rules

• Lack of information

• Rationalization (e.g., ‘other people do it’)

• Analysis of associated risks

• Lack of attention

• Ambivalent feelings toward taxation/benefits

Step 2: Select and test nudge

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Ideal research design

Feasible agency

approach

Review literature Consult the experts Determine experimental design Develop nudge materials Understand project constraints/restrictions Test effectiveness

• Focus groups, pre-implementation experiment

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

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Form solid evidence base: Does the nudge approach have a strong chance of

success?

Measure effectiveness:Did the nudge intervention

facilitate the desired behavioural outcome? By

how much?

Expected results: To what extent will Nudge

work? What is the expected return on

investment?

Step 4: Full implementation

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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

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

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ComplianceAttitudes,cognitions,

environment,norms,

decision-making context

Where do we start? Start small and prove nudge works

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Tim

efra

me

for

Res

ult

s

Complexity

Move to e-services

Desired result:Increase direct deposits

Taxpayer owes money

Desired result: Payment is received

Change in filing behaviour

Desired result:Restore regular filing activity

New tax credit results in high volume of enquiries

Desired result: Decrease in phone enquiries

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Thank you

Jean-Francois.Ruel@cra-arc.gc.ca