Economics: UK bends minds over tax

Tax collectors were given longer leash to chase tax dodgers, among other tax-gathering measures in the Budget in May. These collectively would net $1.73 billion over the next four years, Revenue Minister Peter Dunne told Parliament’s finance and expenditure committee. This revenue to the Government reduced the likelihood of direct tax increases being called for.
On the Inland Revenue website, meanwhile, taxpayers who suspect they have been involved in tax avoidance scheme are encouraged to correct their tax affairs by making voluntary disclosures.
Every little drop helps, as the Government aims to reduce its operating deficits over the next three years and return to surplus in the 2014/15 fiscal year. This daunting fiscal task calls for higher revenues as well as tight constraints on discretionary spending. Core Crown tax revenue is forecast to increase over the next four years, reaching $71.2 billion (27.8 percent of GDP) in 2015/16.
As the Treasury explains in Budget documents, all major macroeconomic drivers of tax revenue (compensation of employees, entrepreneurial income, operating surplus and domestic consumption) are forecast to grow at above four percent year.
In addition to the impact of economic growth, the fiscal forecasts include several policy changes including alterations to tobacco excise, fuel excise and road user charges.
But maybe the British can teach us how to pull in even more revenue without having to chase up tax miscreants. Richard Thaler, professor of economics and behavioural science at the Booth School of Business at the University of Chicago, showed us the way in recent column in the New York Times.
Pushing his own line of academic expertise, he mused on what might happen if Council of Behavioural Scientist Advisers was set up to counsel the President of the US, to complement the advice that flows from the Council of Economic Advisers. After all, economists teach us that monopolies are harmful, so should they be the only social scientists with anything useful to contribute to the efficient running of government?
Thaler – who is involved as an unpaid adviser – can point to British government initiative to show what might happen. It’s the Behavioural Insights Team; tiny branch of government led by social psychologist and set up by the Conservative Prime Minister shortly after David Cameron’s centre-right coalition took office nearly two years ago.
One of the team’s mantras is simple: make it easy if you want to encourage some activity. It was invoked in the team’s quest for way of collecting taxes from people who fail to pay on time. As in this country, most British citizens pay their taxes promptly because it is collected from their pay.
But small-business owners and individuals with significant non-payroll income are expected to file return, and if they miss the deadline, they will receive letter asking for payment within six weeks. Tougher – and more expensive – measures are taken if that doesn’t work.
Could this be improved? Indeed it could, by following the advice of Robert B Cialdini, an emeritus professor of psychology and marketing at Arizona State University. His observation is that people are more likely to comply with social norm if they know most other people are complying, too. An example: seeing other dog owners carrying plastic bags encourages others to do likewise. This suggested statement added to the tax collector’s hurry-up letter – noting that vast majority of taxpayers pay their taxes on time – could encourage others to comply. Even better, some local data should be added to fortify the message: “nine out of 10 people in Exeter pay their taxes on time”, for example.
Sure enough, trial letters achieved 15-percentage-point increase in the number of people who paid before the six-week deadline, compared with results from the old-style letter. As Thaler points out, if rolled out across the country, this could generate £30 million of extra revenue annually.
Not bad for team whose entire budget is less than £1 million. M

Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.

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