Effectiveness of nudges on small business tax compliance behavior

Abstract

There has been a surge of basic and applied interest in exploring how small changes in decision contexts might be used to improve heuristic decision-making, “nudging” decision-makers toward choices that increase individual and social utility. The present study tested the impact of three types of nudges on tax compliance among delinquent businesses (n=3,130) in the state of Pennsylvania: (1) sending reminder letters that almost identically matched original tax delinquency notices, (2) sending redesigned reminder letters that simplified text and layout, increased the salience of critical information, and included an “Act Now” urgency statement, and (3) sending redesigned reminder letters with handwritten notes on the envelope. Redesigned reminder letters significantly increased the number of business owners who responded and the amount of delinquency paid within 15 days of receiving the notices. The addition of a handwritten note on the outside of the envelope did not additionally increase response rates or payment amount. Although the effect sizes observed in this study were small, the potential impact is large given the number of delinquent businesses and the average amount of taxes owed in Pennsylvania.