The role of behavioral economics in designing effective tax compliance programs: an economic field experiment

Tax compliance continues to be an issue for transition economies, and it is evident that the conventional system of penalties has not been sufficient to address the problem. In order to examine the effectiveness of behavioral policies as low-cost solutions to increase tax compliance, a randomized field experiment was conducted in Uzbekistan. Eight thousand two hundred taxpayers who failed to submit their tax returns by 2024 were randomized into a control group and four different treatment groups namely, social norms treatment, simplification treatment, moral obligation treatment, and mild deterrent treatment. Each treatment group received a letter, which contained contents related to behavioral economics. Simplification of process was found to have the highest impact in terms of the percentage of increase, which was 8.5 points above that of the control group (22.5%). In addition, the other interventions included mild deterrence (7.4 percentage points), social norms (6.2 percentage points), and moral obligation (3.8 percentage points). Process simplification was also found to generate the greatest improvement in payment of taxes (27.1%) and the most efficient benefit-to-cost ratio (21.6). Low income earners and elderly taxpayers were found to be the least responsive to any form of reminder. The empirical results show that behavioral policies, especially process simplification, have a much greater impact on improving tax compliance in transition economies than conventional enforcement methods at a much smaller cost. The effect of the simplification treatment on tax compliance was an increase in filing rates by 8.5 percentage points and tax payments by 27.1%, with the benefit-cost ratio of 21.6 being considerably superior to those of moral suasion (7.2) and deterrence (18.7). Still, these policies can be quite ineffective for some specific groups of taxpayers: people with low income reacted only to simplification, while the elderly ones (aged 56 or above) were not sensitive to any interventions. This research gives valuable implications for the tax authorities in transition economies in terms of the design of policy programs that can increase revenues from taxes and do not impose additional enforcement expenses and damage to the taxpayers’ trust.

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