# II. Literature

The literature on the application of insights from behavioral science to tax compliance is relatively new, though builds off assumptions of taxpayer self-interest and puts into question the notion of the rational, fully informed taxpayer. Traditional models of tax compliance (based on the expected utility theory (EUT)) assume that taxpayers are rational and act selfishly to optimize their utility (e.g., see Allingman and Sandmo, 1972 and Yitzhaki, 1974). In other words, taxpayers minimize the amount of taxes they pay given the audit probability they face, and tax authorities have complete information about taxpayers (as well as the resources to carry out enforcement activities when risks are identified).

However, the empirical evidence does not support the EUT in different ways (see Pudney et al., 2000; Dhami and Al-Nowaihi, 2007), leading to new approaches to enforcing tax compliance that assume taxpayers are only partly rational, and make decisions based on other factors such as tax morale, limited attention and the credibility of enforcement actions from tax authorities (including how much information they actually possess about individual firms), among others. These new approaches (not necessarily directly informed by behavioral science, but nonetheless applying many of the shared tools) have been documented through the widespread use of tax experiments (information field experiments), which highlight the role of communication (or more generally, engagement) by the tax authorities directed at taxpayers to induce a change in behavior without the need for more aggressive (and thus costly) interventions (such as audits and the execution of penalties and fines) (Mascagni, 2018). The assumption of this approach is that the mere communication of information (e.g., that behavior is being monitored) is enough to change behavior, since it influences the _perception_ from taxpayers that they could face consequences.

In the wake of this experimental tax work, various studies introducing key elements from behavior science into the tax compliance/evasion function have been carried out in low- to high-income countries (Hallsworth, 2015; Hallsworth et al., 2017; Rees-Jones, 2018; Cranor et al., 2020). In practice, this approach assumes that taxpayers are quasi-rational (see Engström et al., 2015), but they are first and foremost human, meaning that their decisions are a function of their knowledge (awareness of tax obligations), attitudes and beliefs (about institutions, the behavior of other taxpayers, etc.), and their cognition (their mental capacity to carry out their obligations, which can be confusing, time-consuming, and frustrating) (Goodnow-Dalton et al. 2021). Moreover, the approach acknowledges that tax authorities rarely have the necessary resources to carry out all the audits they would like, or even the complete information to fully assess the risk of certain taxpayers (Pomeranz & Vila-Belda 2019). This body of evidence points to important (and generally, costeffective) impacts of targeted communication from tax authorities, highlighting how the effectiveness of different approaches (language applied, channels used) is highly sensitive to the context. For example, evidence points to the highly effective use of communications centered around deterrence messages (Hernandez et al., 2017), social norms (Hallsworth et al., 2017), national pride (Hallsworth et al., 2017), and public goods provision (Mascagni et al., 2017) relative to no messages or in many cases standard messages without any behaviorally informed cues (status quo framing and language used by tax authorities).

While substantial evidence exists suggesting there are gains from using behaviorally informed notification strategies to induce taxpayer compliance, a more systematic handling of the evidence puts into question the reach of this approach in the long-run, as well as the expected magnitude of these impacts. Atinyan & Asatryan (2020) conducted a meta-analysis of 45 randomized controlled trials applying nudging approaches to tax compliance and found that effects from these experiments are small in magnitude and limited to deterrence (hard or strong tone) messages meant to influence perceived audit probabilities and the private costs of noncompliance (fines). Atinyan & Asatryan’s findings are important given that the approach continues to be applied across countries, and their relevance in even more challenging environments for tax authorities needs to continue to be validated.

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