Can Behavioral “Nudges” Improve Compliance? The Case of Colombia Social Protection Contributions

Abstract

The Government of Colombia imposes a variety of taxes that must be paid by individual wage earners, called in their entirety “social protection contributions”. Since 2007 individual payments have been collected using an on-line mechanism. In order to improve compliance, the Government used a controlled field experiment in which various “pop-up messages” were sent to individuals when making their on-line payments, as behavioral “nudges”. We examine the impact of these nudges on individual reporting behavior. We find mixed evidence that these messages increased compliance rates relative to a control group that received a so-called “neutral” message. However, we also demonstrate that the use as the control group of individuals receiving a so-called “neutral” message creates considerable bias; that is, the receipt of any message of any type clearly influences behavior. Instead, we show that the appropriate control group should be individuals who receive no message at all. When this control group is used, we find that self-employed individuals generally increase their contributions; individuals who are making declarations on behalf of all employees in their company are less likely to respond to messages in a systematic way.

Taxes and social instability: How large corporations and wealthy taxpayers hide taxable money?

“…The results highlight multiple mechanisms of tax evasion and tax avoidance used by large corporations and wealthy taxpayers including tax havens, the underground economy, aggressive tax planning, parallel financial markets, and cryptocurrencies. This paper also contributes to the current debate on tax compliance (Jiang et al, 2022;Vainre et al, 2020;Alm et al, 2019;Fonseca and Grimshaw, 2017;OECD, 2004) by suggesting potential strategies to reduce tax evasion and tax avoidance. These strategies include preventive actions, active monitoring of compliance indicators, peer reporting and international cooperation.…”

Is Economics Useful for Public Policy?

“…Also, this work often finds that more audits increase compliance but in a non‐linear way, so that the deterrent effect diminishes with higher audit rates. My controlled field experiments in Colombia with Carlos Ortiz and Diana Rocha have found that telling individuals that they will be subject to “more scrutiny” via a message from the tax authority has a positive impact on compliance, even if small, variable, and fleeting (Alm, Ortiz, and Rocha ). However, there are also other field studies with these messages that find no impact, and sometimes even a conflicting impact, on compliance (Slemrod, Blumenthal, and Christian ; Hallsworth ).…”