Saturday, April 12, 2014

Peer pressure and tax dollars

It's old news that we are all under peer pressure to a certain extent. Would you open your wallet to donate $20 to the "Senior Giving" if I tell you that 80% of our senior class have given on average $20 per person? May be not. It's your money and after all no one can tell if  you have or have not donated. Still, our tendency to conform may be stronger than we think. An experiment has been conducted to suggest that peer pressure changed behavior of delinquent taxpayers:
"The British tax agency, Her Majesty's Revenue and Customs (HMRC), has tested different form letters on delinquent taxpayers. In one letter, this sentence - "Nine out of 10 people in the UK pay their tax on time" - increased positive response by 1.5 percent. Adding another sentence - "You are one of the few who have not paid us yet" - raised the success rate 3.9 percent.
HMRC also found compliance rose 6.8 percent when taxpayers were told they were one of few delinquents in their hometowns.The HMRC's work is led by its Behavioral Insights Team, which is advised by University of Chicago professor Richard Thaler, a founder of the field of behavioral finance.
Other tax administrators have caught on to these ideas on their own, without a behavioral economist to guide them.A push for "plain English" in tax forms over the past decade has led the Washington State Department of Revenue toward behavioral ideas of salience, the idea that people focus only on what they understand.After re-writing the department's form letter sent to firms believed to owe tax on the use of goods or services, positive responses from taxpayers increased 43 percent."
http://www.reuters.com/article/2012/10/29/us-usa-tax-behavior-idUSBRE89S0DD20121029
Are you convinced? Can you think of other ways where conformity can be helpful in motivating economic activities?

5 comments:

  1. Not sure. I think it depends on the connotation. Usually, conformity has two extremes: one being no one thinks about it and two being that it is bad. I worry about which is being referred to in this case.

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  2. I think behavioral economics is a very interesting field. I had heard about the effects of peer pressure on people when making decisions about the environment (e.g. energy and water consumption), and I think its interesting that the same peer pressure can be used to get people to pay taxes.

    Here's an article about peer pressure and "green" choices - http://e360.yale.edu/feature/using_peer_pressure_as_a_tool__to_promote_greener_choices/2141/

    One of the more interesting quotes from this article - “People don’t just want to conserve energy,” says Arizona State University psychologist Robert B. Cialdini, “they want to be acknowledged for conserving energy.”

    On another note, has anybody read the book Nudge? I have not read it yet, but it is supposed to be about behavioral economics and how these subtler things like peer pressure can affect decision-making.

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  3. Peer pressure absolutely has an effect on economic behavior. That is the reason behind the success of many brands. Though two different companies may make the same (or very similar) product, an individual may be more inclined and may pay a higher price for one than the other because of how they will be perceived for consuming that product (i.e. rolex watches, other companies provide the same functionality but a rolex can be a status symbol). The same concept can easily be applied to taxes. People are more motivated to pay taxes when they feel they will be viewed in a negative light for not paying taxes.

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  4. I agree with Joe that people would feel more motivated to pay taxes because they do not want to be viewed negatively by others, mainly if this involves being classified as a "delinquent."

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  5. I think peer pressure can be very effective especially when it comes to encouraging citizens to choose efficient outcomes. For example it is important when it comes to stealing to make sure people considering theft are in the minority, if we show others stealing then it can normalize the behavior. If on the other hand we show people choosing not to steal, then the opposite could be said. I think this applies to other instances of inefficient behavior exhibited by citizens. It's important to model good/efficient behavior not vis versa.

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