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Standing Committee on Tax and Revenue
17/07/2017
Taxpayer engagement with the tax system

SLONIM, Prof. Robert, Private capacity

CHAIR: I now welcome to the hearing Professor Robert Slonim. We thank you for your attendance to assist the committee with the inquiry. Although the committee does not require you to give evidence under oath, these hearings are formal proceedings of the parliament and warrant the same respect as proceedings of the House of Representatives. As such, the giving of false or misleading evidence is a serious matter and may be regarded as contempt of parliament. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee, and such action may be treated by either house of parliament as a contempt. The evidence given today will be recorded by Hansard and attracts parliamentary privilege. Do you have any comments to make on the capacity in which you appear?

Prof. Slonim : I am presenting myself as a professor of economics.

CHAIR: You did not make a formal submission, so I very much encourage and invite you to make some remarks and an opening statement.

Prof. Slonim : First of all, I would like to thank you for inviting me to participate in the discussion on taxpayer engagement with the tax system. I was quite pleased to see your reference includes an explicit consideration for using behavioural insights to improve taxpayer engagement. As I have just said, I'm here today as a professor of economics with over two decades of experience specialising in the study of behavioural economics. My expertise and experience includes several related fields of study pertaining to the foundations of behavioural economics, including, first and foremost, as an economist, but also consumer psychology and also—I think this is very important for this committee—the assessment of empirical evidence for policy evaluation. My remarks today reflect a merger of these experiences. As you may know, very recently I was seconded from the University of Sydney to be temporary director of research for BETA at PM&C. While today I do not speak on behalf of BETA at PM&C, I have read their submission to this committee and concur with it. Given you have had a chance to discuss the points made in that submission, I hope to focus on some novel observations and avoid being too repetitive with their submission.

To discuss policies to improve taxpayer engagement at this hearing, I would be happy to elaborate on any of the following three points or anything else that you might find useful that I may be able to provide responses to. First, I hope to encourage evidence based approaches and a recognition that not all evidence is equally informative for policy. Second, I encourage behavioural economics insights to be combined with a broader economic analysis and approach to improving taxpayer engagement. Third, I would like to discuss additional potentially important behavioural barriers that I believe are important to taxpayer engagement that I have not seen discussed elsewhere and that might be especially relevant to address in order to improve taxpayer engagement.

First, to make a simple statement regarding the importance of evidence to help inform policy—maybe this is self-evident—all evidence is good but all evidence is not equally good for informing policy. As you have heard from other behavioural economists, the gold standard for evidence to inform policy are randomised controlled trials, known as RCTs. I would be happy to elaborate on the importance of RCTs if that would be of value. The main lesson is that unless and until we test policies on the actual people we hope to influence in the actual context and without them being aware they are being studied, we open the door to misleading evidence. Moreover, even if we have sound policies, without testing how we specifically implement them—which I think is one of the main roles of behavioural economics—it is hard to know the magnitude of the impact of the policy. This is critical for my second point.

My second point reflects the relationship between behavioural insights and a broader economic approach and economic analysis. In particular, economists are more likely to attempt to examine the entirety of all consequences of policy, and I think this speaks directly to the objective of policy. For example, and not unrelated to tax policy, in studies examining charitable donations, my colleagues and I have found in many contexts that policies to increase donations or to increase volunteering in a particular context are almost always associated with a decrease in volunteering or donations in other contexts. Other researchers have found this extends to other forms of policies that might be more broadly construed as increasing prosocial behaviour. This might be one of the overlooked considerations for tax engagement, in that if consumers are motivated to engage more in the tax system and consequently pay more taxes on the premise that it is a benefit to society, this kind of motivation might adversely affect other forms of prosocial behaviour.

Last, there are potentially many barriers to greater taxpayer engagement with the tax system. Discussed elsewhere, as you have seen in the submission from PM&C, are the complexity of and the time needed to engage in the tax system, and its impersonal nature, especially with a move towards online electronic processing. I am more than happy to discuss these in greater detail.

A few additional potential behavioural barriers to taxpayer engagement that I have not seen explored at great length, but that could have a direct relevance for improving engagement, are worth noting. Specifically, the lack of engagement might not be perceived as equally immoral or fraudulent compared to other forms of fraud or illegal behaviour. This could be due to a number of ways in which people can rationalise dishonesty with the tax engagement, including, for instance: first, a lack of a clear victim; second, because of a potential perception that others are not fully complying; and third, because an omission to act—for example, forgetting to provide information in a tax engagement—is often perceived as less of a morally bad action than a conscientious act or an act of commission.

Depending on the importance of each of these potential reasons, there could be different policy approaches. In some, I hope to encourage the ongoing use of evidence based RCT approaches to be a core part of your deliberations, not just a luxury or one-off approach, that you consider broader economic implications beyond the immediate effects on the taxpayer engagement and that you consider addressing a broad set of barriers to improve tax engagement.

CHAIR: I will start with two questions that are related to each other. Given your expertise, your field of study, your observation and, obviously, the role you are moving into, tell me one thing you think the tax office has done that you think you rate as No. 1 that is going to improve or increase taxpayer engagement. Following that, what is one thing it has not done that, again, given your field of expertise, you would like to see it do to improve and increase taxpayer engagement.

Prof. Slonim : They are great questions. If I had to choose one thing from many—

CHAIR: You can do the top two if you like.

Prof. Slonim : This is not going to be novel but one of the things is about pre-populating and anything that can make the application process easier and that simplifies the cognitive burden on individuals. I want to state a slightly less obvious reason why I think this is important. The obvious reason is you are reducing people's time and they will feel more confident in their ability to complete a form. There is another one, which is, when something is very complicated, it gives you more of what we might call 'moral wriggle room' to do dishonest behaviour. If something is complicated and I am not really know sure of how it works, I do not really process fully whether this is what I am supposed do or this is what I am supposed to do, it opens the door for people to act less morally. So I think it is a really important thing that the more cognitively simple something can be, the more it is clear to people what the right things to do are. I think that is something that has been moving in the right direction but could clearly move more in that direction.

I am an academic so I have to have lots of caveats in my explanations. We tend to have many identities. I have a business person's identity so I worry about my salary and I worry about supporting my family. On the weekend, I go to church and I have an identity of my relationship to the church. To the extent that we can frame the tax compliance around identities that are prosocial to society, that are beneficial and that correspond to the positive values that individuals have, I think that could be better.

CHAIR: Could you give me an example of that. What are you talking about? I think I know what you are talking about but give us an example.

Prof. Slonim : It might be the way in which and where we present the information for when people complete their materials. Imagine we had a tax compliance system where somebody is doing it just before they have been laid off. That would be a terrible time to do this. They would be worried about money and stressed and it would give them an opportunity. It is difficult. You work on an annual cycle, and maybe I am presenting something that is unrealistic, but you could do this around when people are in positive moods. Maybe we could say, 'We have simplified your form so it is only going to take half an hour to do. Do it Sunday afternoon when you are with your family, when you have been to church,' or something of that nature. I have not really given this enough thought to give you a precise time or idea. But the idea would be to try and do it at an opportune moment. With a little time and deliberation, we could think about ways to do this at opportune moments in people's lives during the year.

CHAIR: Thank you.

Ms BUTLER: Can you do that in a way that makes interacting with the tax office more amenable to mobile devices, or do you think that the security problems are going to always operate to prevent that from happening? If you're trying to do things to fit around people's lives so they are in a better state of mind when they are trying to undertake their compliance, are there limits on what you can do to make that possible?

Prof. Slonim : This would come to a broader question of trust in how it is being presented to them. So if it's a mobile device, do we trust the security of the device; do we trust the way that it's being presented to us? It could be there are certain means of communication that are going to appear more trustworthy than others. I worry about mobile devices and I worry about emails because we are also used to a lot of scams and a lot of invasive things, and there are concerns in the news on a regular basis. That would have to go hand in hand with other policies that would ensure that people are going to feel more confident and trusting in the medium by which they are being approached.

Ms FLINT: Could you expand on the nudge principle. What does that look like in a tax context? You've already spoken about the prepopulation. Is that what you classify as a nudge? Could you elaborate on that?

Prof. Slonim : I actually would not classify that as a nudge because that is much more of an intervention, where you are providing information for them. What I would argue is that if people were to want to actively provide false information, prepopulating it makes it more difficult because they have to change it and actively go and take something that has been provided that is truthful. To me, a nudge is a much more minor intervention. It's typically a framing or a provision of information that may seem inconsequential.

An example that has been tested in a variety of contexts, although I don't know if it's been tested in the tax compliance context, is when you ask people to certify the integrity of the information they have provided. We typically think that you complete a tax form and then you sign at the end. Actually, this issue is greater online. It's now a digital signature; it's not even a physical act. A nudge might be to actually ask people to comply at the beginning of the form with an honesty statement.

In this type of nudge, we're getting people at the very beginning of an application as they are starting to go through a form and completing information to be primed to be thinking about their own identity—the kind of person they are and thinking about themselves. I joke about this, but where we are concerned about people providing fraudulent information, I would love to see policies where they have to have a picture of themselves. They could have a mirror while they are competing information. This goes back 40 or 50 years, but there are many psychological studies that show people are more honest, more giving and more charitable if they have to look at themselves while making choices. The idea is they are reflecting on how they want to perceive themselves in their own identity.

In a tax context, imagine that you sign some honesty code at the beginning, saying, 'I swear this is the truth,' before you complete any information and maybe there's a constant reminder that you've signed saying it. I don't know how you do this with paper and pencil, but online imagine that that information keeps showing up throughout the whole application that you have signed this honesty code. Those are nudges. In some sense, we haven't changed the form, we haven't changed the other information; all we're doing is nudging them to think about something else in the process.

Mr LEESER: How is that not like the terms and conditions statement that people click on in any IT application, which nobody reads, or like the terms and conditions for a new bank account that nobody reads?

Prof. Slonim : Absolutely. I think that same form of nudge could work in filling out an insurance application. Rather than have it click through, have it on the page. Rather than it being multiple pages—and that is why no-one reads it or we've read it once at some point in our life and we don't care anymore, or we don't think it's important—have it right there on the page and have it be two sentences. I know that, with PM&C, with the Data Group, one of the philosophies in the UK BIT and in New South Wales—one of the points that is really critical is that it needs to be easy for people to process this information. If it is multiple pages, to try and get people to read something and dissect a complicated piece of information, it is going to be tricky to be able to affect people's behaviour. You can still have all those terms and agreements that they can read through if they want to, but have on the page: here are the two sentences that matter.

Mr LEESER: I went to a talk that was given by some people involved in a faith based organisation, who talked about character being what you do when no-one else is looking. I understand that is part of what you are trying to suggest. If you are looking at yourself while you are filling this in, people are more likely to be honest.

Prof. Slonim : That is absolutely the case. When we are filling out these forms, we are doing it at home and no-one is watching us, and often it is very hard to detect. So it's going to have to be something else that is motivating you, and there is a moral issue here in how people see themselves. Another suggestion is thinking also—I mention this very briefly—about who benefits and who is harmed by my behaviour. We can think of this as both positive or negative. When I am complying in fully completing forms and doing things accurately, there are people that benefit: there is more revenue into the government; there are more services that can be provided. The flip of that, the opposite of that case, is that when I'm not providing full information or I'm omitting to report some cash earnings, some activity in the black economy, then there are people that are harmed by this. There is less revenue that is being collected, that I was responsible for paying into the society, and people are harmed. I think that information is very unsalient to people when they are involved in tax compliance. They are not aware. They don't see this as other people being harmed or benefitting by my behaviour. It is a lot easier to slip morally. It is not that people are immoral and bad people and that they are actively seeking to do this, but if you make an environment in which people think no-one is being harmed by this, all else equal it is easy to fudge a little bit.

Mr LEESER: As you know, the tax office provides people with a receipt now after they have lodged their return which says that if they paid $50,000 of tax of whatever it is, X thousand went on welfare, of which Y thousand went to the age pension, and Z thousand went into education and defence and so on. Is that making any impact?

Prof. Slonim : I don't know. I like the idea. I think it is in the appropriate spirit of letting people know that, when they are reporting and paying their taxes, this is actually something meaningful. It is not going into the abyss. A slightly different way to say that is that people are very moved by anecdotal evidence. We see this over and over again. You can have the greatest policy, but if one person is harmed as a result of that and that becomes the anecdotal story and the media picks up on it or other people pick up on it, it may destroy the credibility of the policy, even if in the process it helped hundreds of thousands of people.

Mr LEESER: How do you put that up-front when people are doing their tax? How do you give people that information as they are going?

Prof. Slonim : I haven't worked this out, but one could imagine that in some simple way you could have just at the beginning something saying, 'Last year the taxes that were paid'—ideally relate them to something in the local community. I can give an example out of the context of tax for a moment. We do work on blood donations, and typically in most nations when you donate blood it goes into a national system. If I give blood it doesn't just stay in the CBD in Sydney. It can go wherever the blood is needed. Yet, if you tell people that their blood is being used or is being needed locally and it's had some value and 25 cancer patients received blood transfusions in the last several weeks in the area where you donated blood, that seems to be a very powerful motivator. It seems to identify and give very concrete examples to people that they can understand about the value of this. I suspect in the tax system, the more concrete—I don't know how easy this is technologically, but to talk about the values going into the communities to which people are living I suspect could be a very powerful motivator also.

Mr LEESER: How do you do it in the space of a black economy, where have people are employing foreign workers who are on incorrect visas, paying them in cash, paying them much less then they are entitled to get and operating, perhaps, in industries that you would perhaps call the vice industries? What do we do with that class of people?

Prof. Slonim : I think that is a much more challenging problem in that it is maybe not the purview for behavioural economics, at least not when we think of the most fraudulent types of behaviour—premeditated. I think behavioural economics works better for things that we think are small changes. I don't think behavioural economics is going to take a hardened criminal and affect their behaviour. I think it speaks, though, to what I think of as the masses of people that do small things. When we implement policies, it can work on that dimension. In fact, I think a lot of times the real cost in society is millions of people—or maybe some reasonable per cent of the population—doing something minor as opposed to some small per cent that are doing something major.

I don't know the statistics on the black economy well enough to know if half of the tax revenue is being lost or one per cent. I think a lot of what is happening in the black economy will be more direct, larger-scale fraudulent behaviour. It is not something I am an expert on. If I knew more and had a better understanding—there might be parts of the black economy that are very minor and small types of instances that it could work on. The parts that are the major criminal activity, I don't think so.

Mr LEESER: Does behavioural economics have anything to say about preventing people getting involved in the black economy in the very first place?

Prof. Slonim : The question is, is there what I call a slippery slope? Can you slowly ooze into this? I have been unemployed and I am hard pressed for money, so I start working in a cash economy. In that first few months you could almost imagine that it is really easy to not report—'Look, I just need every penny I'm making right now. I'm going to work in a variety of jobs in which we just don't have receipts. I'm not formally being employed in an organisation. There are no tax records of this.' How could we prevent that? I haven't thought about that. I think it is a good question.

I think a deeper question is, is this a slippery slope? Do we move in this direction? Does it then lead to further and more nefarious types of behaviour or do people just slip in and out of the black economy? If people are slipping into the black economy and this is a pathway towards major fraudulent behaviour, it would be a high worth of effort to try to understand how to avoid that initial slippage. If people are slipping in but then they are slipping back out again and it is a circumstantial for some short period in people's lives, it may not be as big of a national issue to worry about. I don't have an answer to that.

Ms BUTLER: You would have to focus on the employers, wouldn't you, rather than the employees? If you are taking a second job somewhere, the employer doesn't give you—what is a group certificate called now?—a payment summary and you have earned a small amount of money, you are not going to put it in jeopardy by insisting that the employer comply with their tax obligations, are you? Don't we need to actually look at the people who have the power in the relationship and try to persuade them to be more pro-compliance?

Prof. Slonim : They have mutually agreed, at some level, to the relationship if somebody is paying them, not recording it officially and we know they're not seeing tax records. That said, you are right. The person with the lower power ranking may feel that they have no choice. It is very difficult, because once you begin this relationship what you do afterwards? I can't go and complain later, because I am then admitting to having done something that was illegal.

Ms BUTLER: Or I'm putting the employer in strife by recording the income and saying that they never gave me a payment summary so I can't then hand it in—that is a problem for me because I am trying to do my tax return. Then the employer gets cross at me and I don't get the work in the next financial year. It seems to me that if we need to nudge someone, the people with incredible amounts to lose are not the people to nudge, it is the people—

Prof. Slonim : It's the people that are exploiting the situation.

Mr LEESER: At some point along the line—this is where my question was more directed—presumably they start a business and they think, 'We're going to operate by the book,' but they slip. How do you prevent the employer slipping, as it were?

Prof. Slonim : I think I am going to withhold comment. When you get into the business environment, then you are also not acting for yourself; you are acting for an organisation. You may have broader interests. You have a variety of stakeholders. You have other employees; you have your customers now. I think it is a more complicated situation to think about—the motivations for why they are heading in this direction.

Mr LEESER: I wonder, colleagues, if I could test the limits of behavioural economics a little by using a different example. This is not necessarily related to our inquiry. Is behavioural economics able to do anything in the drugs area—to help governments come up with a message to discourage people from taking illicit drugs? Where are the limits of behavioural economics in this space?

Prof. Slonim : I think the strengths of behavioural economics, first of all, are at the individual level when people are making decisions for themselves. I think it just came up in the previous example. I do not see any reason behavioural economics could not be in that particular context. If I think about the major behavioural limitations or behavioural barriers that cause problems for people in choice, social norms could be and information. So, for example, in illegal drugs—I don't know what people's ages are in the room here but when I grew up, when I was a young child, and I was in middle school I could remember seeing these movies that would be brought to us about doing illicit drugs. They were, I think we would say, absurd—'If you smoke one marijuana joint you're going to jump off a roof or you're immediately going to become a heroin addict and immediately go into all sorts of lives of crime.'

First of all, I don't believe that was ever evidence based, which, I think, is a real issue in the first place. I think it is misleading information. But, secondly, I think it didn't speak to the audience and it didn't speak to the issues the audience cared about—for example, what gets people to start using illicit drugs. It could be peer pressure, it could be social pressure. If one could combat that with nudges—providing information such as: in fact, most of your peers don't engage in sexual activity as a youth; they do not do illegal drugs. I think that can be a very powerful nudge. So it is how you would frame the social norms around them. If all of a sudden it is a heroin dealer who is importing millions of dollars of heroin, I am not sure. But if you are talking about the individual user and slipping in to, possibly, starting to use drugs, I think it is very powerful possible approach.

Mr LEESER: Are there limits, effectively, on what behavioural economics can do where people need to make choices? There is some aspect of it, but the more localised and individualised it is the more effective it is. Is that, effectively, what you are saying?

Prof. Slonim : The answer is: absolutely. I would say in every context that I have been in in behavioural economics there are going to be some people that you're not going to nudge. So there are just wonderful people and, no matter what you do, they are always going to be generous, giving of their time and giving of their money. You probably can't nudge them to do more. They are probably pushing their boundaries already. There are also other people that I just don't believe, no matter what you do, they're going to become a generous person and start giving their time, volunteer or donate money. Where the nudges, I think, can work is thinking about there are sets of people that you could nudge. There are people that are really not sure. There are other cases. For example, in cases of clinical psychopathy or other areas where people really do have medical ailments, I am not sure nudging could really work in those cases, either. What I would argue is that in most cases nudges can work to some extent. What we do as scientists is, at some level, find out the places where they really can be effective and where they have the biggest impact, and other places where they don't. In essence, I think that is what a lot of research is about. It is not that we don't think we understand the human condition of what motivates people. It is more understanding—it was kind of my second point that I was saying here. It is where these types of nudges and interventions can actually have a substantive change or only a minor change.

Ms FLINT: What would a randomised control trial look like to test, for example, people signing the honesty statement at the start of their tax return? What sort of sample size are you usually working with? Could you just talk us through that?

Prof. Slonim : Bigger samples are always better. Seriously, that kind of nudge is a trivial kind of RCT to run. People are going to be going online. They're going to be going to some pages through the tax office. They're going to then complete some forms—for example, they could be prepopulated or not prepopulated with some information. So you could trivially do this when somebody comes in to start this form, and they could just be randomised. I think with IT today this could be done in a week or less. They could probably send you to a variety of different web pages. They would look almost identical except for the thing you want to change and test. So, in one case, the signature could be right there at the beginning; in another place, it could be at the end of the form. It could be that it's prepopulated on one page; it's not prepopulated on the other.

I actually warn against doing too much—sorry, I am an absolute champion of RCTs and doing the studies. The risk is that, if you do too much, you do 20 trials on: let's see which ones are going to get greater tax in place. We do 100 trials. One of them has to do better than the rest in the end. We'll look at the data afterwards. I actually think it's better to stick to the things we actually suspect are going to have a pretty substantive effect and focus on a couple of them, and we can have confidence in that as opposed to, if we try 20 trials or 50 trials and say, 'Oh look, this was the one that did the best. We should use this in the future.'

There is some random chance in a trial. The smaller the number of things that you test and the more people you have in them, the more you're going to get confidence in that. I think you could also try what we call kitchen sink. You could do a trial where, in one case, you use a current system and, in another, you start with a signature at the top, start with a short story of how your taxes benefit people in your area and with social norms about how most people pay their taxes and pay them on time and fully. You'll probably get an enormous effect.

I guess in one sense these are easy trials. If you haven't done them, they may sound complicated, but in fact, having worked in this area for a long time now, these are things that can be done very quickly and they're very easy and very powerful.

CHAIR: Thank you. We thank you for your attendance at the hearing. You'll be sent a copy of the transcript of your evidence. You will have an opportunity to request corrections to any transcription errors. If you've been asked to provide additional material or if there is further information that you would like to provide, please forward this to the secretariat by Monday, 31 July 2017. Additionally, the committee may provide you with further written questions on notice during the course of its inquiry, with your responses to be taken as additional evidence. We thank you for doing that, if need be, and we thank you again for taking part today.

Prof. Slonim : Thank you very much for inviting me. Good luck with your work.