Nudges and Threats: Soft vs Hard Incentives for Tax Compliance

We study what induces delinquent wage earners to pay their taxes due, using high-quality administrative data from the Swedish Tax Agency. We find a strong effect of the standard enforcement regime: a threat of having the debt handed over to the Enforcement Agency increases payments by more than 9 percentage points (from a baseline of 58%). When including actual enforcement, payment increases by 19 percentage points compared to those who do not risk enforcement. In a field experiment, we compare these effects of standard enforcement to those involving much milder nudges, consisting of letters reminding tax delinquents to pay their taxes due. We find that a “pure nudge” (i.e., the inclusion of an extra sheet of paper with no valuable information) has an effect of around 7 percentage points for those who do not risk enforcement upon non-payment, i.e, an effect almost as large as for the threat of enforcement. However, the same nudge has no detectable effect on the group that is subject to enforcement. Finally, we find a small additional effect on payments from social norm messages both for those who risk enforcement and for those who do not.