CRA’s Nudging Ways - Canadian Government Executive
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March 22, 2016

CRA’s Nudging Ways

Eight years ago, the always prolific University of Chicago Law School professor Cass Sunstein (he is now at Harvard) teamed up with a colleague, Richard Thaler, a University of Chicago economist, to publish Nudge: Improving Decisions about Health, Wealth, and Happiness. It was a sensational success, and of particular relevance to anyone working on policy and program delivery. The book drew heavily on psychology and behavioural economics to make the case that governments could play an important role by setting particular defaults in the choices individuals make in dealing with various services. In so doing, it would likely deliver a better service at a better price to most people. That suggestion of an alternative—the “nudge”—was not a dictate. It was merely a suggestion, but one that was likely to be accepted by any given citizen.

The idea took a long time to penetrate government offices. Sunstein joined the Obama administration in 2009 and for three years directed the White House Office of Information and Regulatory Affairs. In 2010, the United Kingdom government created the Behavioural Insights Team (known as the “nudge unit”) in cabinet office. (BIT is now a partnership between Cabinet Office and NESTA, an policy think tank.) BIT has done innovative work around the world with behavioural economics. Its staff has written reports on the behavioural science of recruitment and selection, a study on how and when mobile phones are stolen in the UK, and the behavioural insights around organ donation—just to name a few of their more recent projects.

Many are heralding units like BIT as the future of evidence-based decision making, and the use of nudging is held up as a prime example of the benefits of this new approach. The Australian Tax Offices have also successfully employed nudging techniques and the United States recently launched a Social and Behavioural Sciences Team that explores, among other things, nudging.

With no obvious champion in Canada, the idea took a lot longer to win adherents. In Canada, one basic decision proved a hurdle: if citizen will not be left to their own devices to select a particular feature of a policy or program, what should the default be? At the CRA, an even more basic question emerged: could it harness the power of the nudge to get people to pay their taxes on time? In Canada, 94.5 percent of adults pay their taxes on time.

It decided to experiment to see how to best give people owing taxes a ‘nudge’ to encourage repayment and raise the score on this metric. “There are a number of ways that nudges can affect behavioural change with regard to taxes. For example, a commonly cited study from the U.K. found that when individuals who owe taxes are told that most people pay their taxes on time, they are more likely to comply,” said Philippe Brideau, senior spokesperson with the CRA.
The experiment was nominated for an Institute of Public Administration of Canada Innovative Management Award in 2015.

Simply put, the experiment involved writing letters to people who owed taxes. Some letters nudged the recipient to pay taxes and then to check how they compared to their peer group, while others received a standard collection letter. The CRA then tracked the change in repayment rates between these groups.

Studies had shown that people did not focus on the details of collection letters, so for this experiment the CRA put its nudge right near the top of the letter, followed by the amount owing and then the standard letter content. In all, 8,000 outstanding accounts (owing between $100 and $950) were involved in the experiment, these were broken into four groups of 2,000. The first control group received no letter, the second received the standard collection letter, the third group received a positive nudge, and the final group were given a negative nudge.

“Nudges may vary in the way a certain message is framed. For instance, in relation to the above mentioned study, the ‘positive’ nudge was the presentation of tax compliance as the behavioural norm of the majority. On the other hand, the ‘negative’ nudge was the presentation of tax non-compliance as behaviour associated with the minority,” said Brideau.

In other words, a positive nudge would tell the readers of a letter what a large percentage of people pay their taxes, while a negative nudge would indicate to the recipient that they were among a small number of Canadians who haven’t paid their taxes.

The results of the study were quite encouraging. “The results revealed that the nudge letters were more effective at increasing taxpayer compliance compared to a standard CRA compliance letter. Specifically, a higher percentage of those who received the nudge letters paid their debt in full (9 per cent of those who received a letter with a “negative” nudge message and 8 per cent who received a letter with a “positive” nudge message) compared to those who received the standard compliance letter (7 per cent),” said Brideau.

From the government’s perspective the results of the experiment provided welcomed news. Full repayment of taxes owed may be a pipe dream, but a solid increase in collection through means as affordable as changing the content of a collection letter could be a real boon for government coffers.

“Nudge techniques can hold significant power to improve public policy outcomes,” said Brideau. “Nudge techniques have been shown in many cases to be effective at producing behavioural change in a manner that is cost-effective and does not substantively limit individual choice.”

This is why nudging has become so popular. “The long-term impact of nudges is an important consideration for policymakers,” said Brideau. “Given that many of the experiments involving these techniques at the Agency have occurred relatively recently, more research is needed to consider longer-term effects. That said, a number of CRA experiments have been or may be revisited over time to evaluate the long-term impact.”

While a certain type of messaging or nudge might work now, there is no guarantee that the technique won’t grow stale and people will revert back to their old habits. On a grander scale, some critics of nudging, including The Economist, claim that these higher rates of collection may provide a shot in the arm to cash strapped governments, but in a world of billion-dollar national debt and deficits, the amount of money practices like nudging will not solve national problems.
The CRA has established itself as a leader within the government of Canada in the use of nudging. They say they currently have numerous projects already in the field to help them to continue to build evidence-based approaches to the use of nudging and behavioural economics.

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