Behavioral economics taps power of persuasion for tax compliance

Mon Oct 29, 2012 6:02am EDT
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By Nanette Byrnes

(Reuters) - Can peer pressure make delinquent taxpayers pony up what they owe the government?

Behavioral economists say it can, and some tax agencies in both the United States and Britain are taking their advice to heart -- and finding that they are reaping rewards.

Behavioral economics has already upended investing and finance with new theories on why and how people make decisions about their money.

From the simple re-wording of late notices to changing the structure of back-tax payment plans, tax collectors are getting results by tapping into basic human tendencies. Whether it is the desire to do what peers do or to stick with a voluntary commitment, persistent patterns of human conduct revealed by behavioral economics are gradually being targeted to boost tax revenues at very low cost.

"People forget the basis of our system is voluntary compliance," said Ted London, a California-based specialist in taxation with information technology consultancy CGI Group Inc.

"The vast majority of people want to do the right thing. If government can make it easier to understand what that is, it can have a big impact," he said.

Behavioral economists study how social and emotional factors influence economic decisions, using psychology and other disciplines to shed light on how and why we behave as we do when it comes to finance and money.

These researchers' insights have undermined orthodox economic theories that assume consumers and investors make decisions based solely on material self-interest.   Continued...