Inter-American Development Bank
facebook
twitter
youtube
linkedin
instagram
Abierto al públicoBeyond BordersCaribbean Development TrendsCiudades SosteniblesEnergía para el FuturoEnfoque EducaciónFactor TrabajoGente SaludableGestión fiscalGobernarteIdeas MatterIdeas que CuentanIdeaçãoImpactoKreatopolisLa Maleta AbiertaMoviliblogMás Allá de las FronterasNegocios SosteniblesPrimeros PasosPuntos sobre la iSeguridad CiudadanaSostenibilidadVolvamos a la fuente ¿Y si hablamos de igualdad?Home
Citizen Security and Justice Creative Industries Development Effectiveness Early Childhood Development Education Energy Envirnment. Climate Change and Safeguards Fiscal policy and management Gender and Diversity Health Labor and pensions Open Knowledge Public management Science, Technology and Innovation  Trade and Regional Integration Urban Development and Housing Water and Sanitation
  • Skip to main content
  • Skip to secondary menu
  • Skip to primary sidebar
  • Skip to footer

Ideas Matter

  • HOME
  • CATEGORIES
    • Behavioral Economics
    • Environment and Climate Change
    • Macroeconomics and Finance
    • Microeconomics and Competitiveness
    • Politics and Institutions
    • Social Issues
  • Authors
  • Spanish

Rewards Help Tax Payments Become "Contagious"

June 30, 2017 by Carlos Scartascini Leave a Comment


When the clock strikes midnight on December 31, it’s very common to start going over one’s New Year’s resolutions, like doing more exercise, eating healthier food or giving up bad habits. And it’s equally common to forget those resolutions only a couple weeks later. For that reason, sometimes an incentive needs to be added to the good will. Prizes that reward positive changes in behavior have become popular. A payment or cash reward can motivate us to go to the gym, or a moral message can get us to donate blood that saves lives.

These techniques can also be used by governments, for example to incentivize tax compliance. In the tax area, experiences so far have been very diverse. In some situations, they haven’t had an effect, and when they’ve had one, it tends to disappear rapidly. In general, when the rewards have an effect, they only do so on the taxpayers that receive them directly, not on other citizens.

There are many reasons why people pay or don’t pay their taxes. In the Research Department of the IDB we apply Behavioral Economics insights to investigate how the information that governments provide impacts citizens’ decisions and how beliefs that determine decisions to pay or not pay tax obligations can be changed. Our research agenda also includes projects in other areas, like security, pollution, and water and sanitation.


Offering rewards can be a tool to change perceptions and beliefs, and, as a result, behavior. The design of rewards programs is key to their effectiveness. An innovative policy implemented in a municipality of Argentina provided valuable lessons on the design of rewards seeking to increase long-term tax collection, with a “spillover” effect on third parties.

In this case, analyzed in an IDB study, the goal was to change taxpayers’ perceptions as to whether their neighbors paid or didn’t pay their taxes, and of how the State uses tax revenues. People tend to pay more taxes if they think that other citizens are also complying and the government is making good use of public money.

The municipality in Argentina announced that it would award through a lottery 400 prizes to taxpayers who were up to date with their property taxes before the next month’s due date. Each winner would have a sidewalk in front of their property built or renovated, with an average value equal to approximately 10 years of taxes. Moreover, the sidewalk would be constructed with new standards that the municipality sought to establish as model ones: with a tree and a green space that reduced that quantity of water that flowed onto the street when it rained, and a waste basket. The lottery was highly publicized and the winners were announced in the local media.

What immediate and long-term effects did the initiative have on the winners and other taxpayers?

As in previous cases, the financial incentive didn’t have a significant effect. The number of taxpayers who paid their debts before the due date to enter the lottery wasn’t significant.

Once the lottery was carried out and the names of the winners were publicized in newspapers and other media, taxpayers liked being recognized by the government and having their name associated with being a “good taxpayer.” This positive effect, of a relative increase in compliance of 5 percentage points, disappeared after five months.

Nonetheless, the effect of the sidewalks was even greater and more persistent. Once the sidewalks had been built and citizens could witness the work of the government and how it uses public money, those who received the sidewalks were 7 percentage points more likely to pay on time during the subsequent three years.

The changes in behavior among the winners’ neighbors were even more impressive: there was a “contagion” effect from those who paid their taxes and a lasting spillover effect. This is because the delinquent taxpayers changed their beliefs both with respect to the compliance of their neighbors and the use of public money by the government.

The payment increased especially in areas where there had been a deficient provision of public services and the new sidewalks stood out more. Delinquent taxpayers among neighbors were 7,5 percentage points more likely to pay on time; 10 percentage points more likely to pay three months late; and 15 percentage points more likely to pay at some point. These results were maintained over the long term.

As the IDB study explains, the design of the program is key. The offer of a visible and lasting public good allowed the initiative to have positive and persistent effects, including on people who didn’t get the reward. These programs, if well-focused, can have still greater effects. This type of rewards strategy can generate greater and longer-term effects than other more common ones like monetary rewards or the offering of cars or TVs. A well-designed policy that manages to change perceptions permanently can lead to greater tax compliance and greater wellbeing for society.


Filed Under: Behavioral Economics, Microeconomics and Competitiveness, Social Issues Tagged With: #BehavioralEconomics, #LatAm, #rewards, #Taxes

Carlos Scartascini

Carlos Scartascini is Leader of the IDB Behavioral Economics Group and Principal Technical Leader at the Research Department of the Inter-American Development Bank. He is currently focused on expanding the use of behavioral economics in Latin America and the Caribbean. In addition to Behavioral Economics, his areas of expertise include Political Economy, and Public Finance. He has published eight books and more than 45 articles in edited volumes and specialized journals. He is Associate Editor of the academic journal Economía, and Head and founding member of LACEA's BRAIN (Behavioral Insights Network). A native of Argentina, Dr. Scartascini holds a Ph.D. and a M.A. in Economics from George Mason University.

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

Follow Us

Subscribe

Search

Related posts

  • Some Economists Say We’re Less Selfish Than We Think. Why?
  • Behavioral Interventions on One Tax Can Boost Compliance Across the Board
  • Behavioral Economics for Better Public Policies
  • Raising Tax Revenues on a Tight Budget: A Field Experiment in the Pampas
  • The Do’s and Don’ts of “Nudging”

About this blog

The blog of the IDB's Research Department shares ideas that matter on public policy and development in Latin America and the Caribbean.

Footer

Banco Interamericano de Desarrollo
facebook
twitter
youtube
youtube
youtube

Blog posts written by Bank employees:

Copyright © Inter-American Development Bank ("IDB"). This work is licensed under a Creative Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives. (CC-IGO 3.0 BY-NC-ND) license and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed. Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC- IGO license. Note that link provided above includes additional terms and conditions of the license.


For blogs written by external parties:

For questions concerning copyright for authors that are not IADB employees please complete the contact form for this blog.

The opinions expressed in this blog are those of the authors and do not necessarily reflect the views of the IDB, its Board of Directors, or the countries they represent.

Attribution: in addition to giving attribution to the respective author and copyright owner, as appropriate, we would appreciate if you could include a link that remits back the IDB Blogs website.



Privacy Policy

Copyright © 2021 · Magazine Pro on Genesis Framework · WordPress · Log in

Banco Interamericano de Desarrollo

Aviso Legal

Las opiniones expresadas en estos blogs son las de los autores y no necesariamente reflejan las opiniones del Banco Interamericano de Desarrollo, sus directivas, la Asamblea de Gobernadores o sus países miembros.

facebook
twitter
youtube