Do behavioral prompts in pre-populated tax forms affect compliance? Experimental evidence with real taxpayers

Defaults and smart nudges have been identified as potential mechanisms that tax authorities can use to reduce non-compliance. Defaults, in the form of pre-populated fields within the tax form, achieve this by simplifying the... [ view full abstract ]

Defaults and smart nudges have been identified as potential mechanisms that tax authorities can use to reduce non-compliance. Defaults, in the form of pre-populated fields within the tax form, achieve this by simplifying the process of filing tax, thus reducing the scope for errors. Defaults, however, also provide the scope for increased evasion if set incorrectly. We report on experimental data on the effect of correct and incorrect defaults. We also study how nudges that contain normative messages on compliance can mitigate the effect of incorrect defaults. We consider static nudges, as well as nudges that react to inputs by the taxpayer. We find that, relative to the no default case, correctly defaults in tax returns lead to modest, yet significant increases in collected tax revenues. However, setting default levels that under-estimate taxpayers’ true tax liability leads to significant drops in compliance and tax revenue. Behavioral prompts concerning descriptive norms of compliance can mitigate the negative impact of defaults, but only if they are responsive to taxpayer filing behavior.