A trial in Latvia looked at how behavioral science compliance with this process. The goal was to reach can increase tax them at a salient moment in the tax declaration process – ideally influencing them to submit their AID on time. compliance within the The intervention targeted individuals who, while shadow economy. formally part of the tax system, are partially or fully self-employed and differ from the average taxpayer in at least two ways: 1) they failed to submit their AID by the deadline in one or more of the 2013-2015 tax years and 2) their ultimate submission was substantially late. In advance of the 2017 deadline, a total of 4,324 taxpayers identified by the SRS randomly received one of three treatment emails or received no message Tax compliance remains a challenge in Latvia, a as part of a control group. Consequently, 1,081 country where revenues are substantially subverted individuals received each message or were randomly by the large shadow economy. It is estimated placed in the control group. that Latvia’s shadow economy makes up close The first message was a simple reminder. The to a quarter of the country’s GDP, well above message included three short, easy-to-read the average of 14 percent among other OECD sentences to remind individuals of the tax timeline. It countries. Part of this shadow economy includes also included a link to the online submission system individuals who are partially or fully self-employed and contact information (i.e. a phone number) in case and had been delaying or failing to submit their of questions. Signing off with the name of the Chief returns in the past few years. Tax Inspector made the message more personal, as the names of the recipients could not be included for The Ministry of Finance of the Republic of Latvia technical reasons. collaborated with the World Bank on a holistic review of the country’s tax system, an input to the design The second message used an omission/commission of a new, improved tax strategy. The State Revenue approach. In addition to the text from the simple Service (SRS), Latvia’s tax authority, worked with the reminder, this email stated that previously missed Mind, Behavior, and Development (eMBeD) Unit at deadlines were considered unintentional and the World Bank to pilot a field experiment to increase inadvertent (i.e. an honest omission). However, tax compliance. The experiment involved sending future failures would be considered a deliberate act preemptive, behaviorally-informed email messages of non-compliance (i.e. commission). Framing non- to taxpayers with a share of income from self- compliant behavior as deliberate reduces ambiguity employment who had previously demonstrated non- about inaction, increases moral obligations towards compliance with the submission of Annual Income action, and likely increases perceived deterrence. Declaration (AID) forms. The third message relied on social norms. Paired with the simple reminder text, this email highlighted the descriptive norm that an increasing number of The Project taxpayers file their AID by the deadline each year. This drew on the insight that people tend to follow others, in part due to normative inferences about All eligible residents of Latvia are required to submit what others believe is the right thing to do. While an Annual Income Declaration (AID) between social norms messaging often includes a specific March 1st and June 1st. eMBeD and SRS deployed a descriptive statistic on compliance, language on randomized controlled trial with the goal of learning the increasing trend was included as the specific how behaviorally informed messaging could improve statistics were unavailable. The Results All three email messages increased compliance with the AID submission process. Submission in every treatment group (Simple Reminder, Omission/ Commission and Social Norm) was higher than the control group. The omission/commission reminder was most effective in increasing taxpayer compliance with the AID submission deadline and process. Messages telling taxpayers that future failures would be considered deliberate resulted in submission rates that were 9.4% (4.1 percentage point difference) higher than control – a statistically significant improvement. Email messages also succeeded in increasing the timeliness of income declarations. Individuals in the treatment groups submitted their AIDs sooner, and before deadline. On average, those who received the social norm message submitted almost three days sooner than those in the control group. This highlights the importance of communicating earlier with taxpayers to preventa habit of delaying submissions when feasible. Other factors lead to differences in tax compliance. • Individuals who were female and had higher revenue in the 2015 tax year were more likely to submit their returns by the deadline. The gender differences are interesting to note – while the omission/commission message increased compliance for both men and women (with a bigger increase for men), the reminder message only increased compliance for men, and social norms message only for women. • Those who delayed submission only in 2015, compared to those who had submission delays in years prior to that, were also more likely to submit by the deadline. This highlights the importance of communicating sooner with non-compliant taxpayers to prevent a habit of delaying submissions when feasible. Policy Implications As in previous eMBeD research, this Key to this intervention is its targeting of individuals intervention in Latvia demonstrates that who are partially or fully self-employed and have context matters when integrating behavioral been delaying or failing to submit their returns science into messaging in the past few years. The findings suggest that for taxpayer compliance. simple, behaviorally informed In Latvia, as in In Latvia, as in prior work in Poland, tax communication can be used Poland, the most this intervention demonstrates that to improve tax compliance even successful message among this group. Being able included a harder tone context matters when integrating to increase tax revenues has that made salient the behavioral science into messaging potential to positively impact the role of one’s deliberate government of Latvia’s ability for taxpayer compliance and active choice in non- to provide services to citizens, compliance. Both a simple and this experiment presents reminderand a social norm messagealso increased a meaningful strategy for governments in similar timely submission yet not significantly so. settings seeking opportunities to do the same. About eMBeD The Mind, Behavior, and Development Unit (eMBeD), the World Bank’s behavioral science team in the Poverty and Equity Global Practice, works closely with project teams, governments, and other partners to diagnose, design, and evaluate behaviorally informed interventions. By collaborating with a worldwide network of scientists and practitioners, the eMBeD team provides answers to important economic and social questions, and contributes to the global effort to eliminate poverty and enhance equity. Stay Connected eMBeD@worldbank.org #embed_wb worldbank.org/embed bit.ly/eMBeDNews Last Update: September 25th, 2019