Nudge for tax compliance

Behavioural science, an insightful combination of psychology, economics, and linguistics, can improve tax conformity.

- BVR SUBRAHMANYAM PS PUNIA

Traditionally, the tax codes assume individuals to be rational and guided solely by self-interest. In contrast, behavioural science recognises that human conduct and actions often deviate from rationality due to cognitive biases, social influences, and emotional factors. Accounting for these values and conduct moderators in tax laws, regulations, and interactions among taxpayers and administrators may increase voluntary compliance—the ultimate desired goal of tax administration.

Elevated tax law observance is crucial for any nation to collect sufficient revenues for public services, infrastructure, and social programmes. Easily understandable and clearly communicated options and their individual as well as social costs and benefits may motivate taxpayers to comply with tax laws in letter and spirit. Nobel laureate economist Richard Thaler clearly articulates this core theme of behavioural science: "The framing of a decision can significantly influence its outcome, highlighting the importance of presentation. Nudges can be effective tools to help people make better decisions without restricting their choices." For instance, if taxpayers are repeatedly informed that a certain percentage of their tax payments support public goods like education and healthcare, they may be more inclined to comply with tax laws. European Union countries have often employed this framing strategy to enhance tax compliance through a commitment to civic duties of citizens.