Filed under: Development Social innovation

Taxes and pensions

Benjamin Franklin famously quipped that the only things certain in life are death and taxes.

Not yet sure about death :), but British fiscal authorities have been at pains to collect taxes as many Britons apparently procrastinated about paying them on time (after all, J.M. Keynes once mentioned that the avoidance of taxes was the only intellectual pursuit that carried any reward :)).

Upon advice from the Nudge Unit, British tax authorities employed several tools to influence human behaviour:

  • In one experiment, British Courts Service sent personalized text messages to remind people to pay their fines on time. As a result, bailiff interventions were reduced by 150,000 and £30 million was saved.
  • In another town, telling people that their neighbours had already paid their taxes resulted in a 15 percent rise in tax collection and another £30 million in extra revenue.
  • Collection of car taxes provides yet another eloquent example. The respective tax service sent a letter to non-payers containing a banner headline suggesting pay your tax or lose your car. This alone doubled the number of people paying the tax; when the letter was personalized with a photo of the car in question, it tripled.

Ever heard about risks to sustainability of the pension system? The issue is increasingly relevant for “greying” and shrinking populations in various parts of Europe, including in the western Commonwealth of Independent States (CIS).

For many countries, introducing private pension schemes (so-called second tier), might appear to be the only solution to avoid a crumbling of public pension funds. However, even with the private pension funds, there is risk that people will procrastinate and avoid starting making pension savings (exactly like Malawi of Kenyan farmers with procurement of fertilizers).

So what should policymakers do to solve this issue? The behavioural science response was to switch the defaults: If initially employees had to fill out a form to participate in the company’s pension plan, then after the switch the employee was automatically enrolled in the plan and had to communicate separately in order to opt-out. When one big US corporation introduced these new default rules, enrolment rocketed to 86 percent, an increase of 29 p.p.

Moreover, automatic enrolment leveled off all the previous differences in participation due to sex, job tenure and race.

Cleaner communities

And now for the icing on the cake… a relatively “soft” issue, but which affects all of us: littering.

In one experiment conducted by the Danish Nudging Network in a collaboration with the city of Copenhagen, green footprints were painted to lead to trash bins on the streets. This trick reportedly led to a 40 percent reduction in littering.

In the London Borough of Southwark, the council gave actors giant litter costumes to “create a scene‟ in the streets.

The actors (later replaced by staff members) engaged with the public, cheering and thanking passers-by who put litter in nearby bins.

This experiment again resulted in a considerable decrease in littering in the community – much more than any standard leaflet-based awareness campaign would achieve.

Insights from behavioural science can be applied in various areas of development.

Ultimately, its wide applicability stems from the approach of the behavioural science to understand that people are HUMAN, often not making conscious and rational decisions. And development is about people after all.

However, development practitioner beware, this approach does not go without a certain degree of criticism.

These are just a few examples to whet your appetite – once we decide to test these approaches in our work I am sure many discoveries will unfold.

Do you have any other practical examples to share?

  • miss

    One I remember is this: sometime ago in Lagos state NG, people had the habit of breaking traffic rules. For instance people would drive against traffic in one-way roads or even dual carriage roads to beat traffic jams in other areas. Sometimes people would drive on designated bus lanes to beat traffic. The traffic situation in the city was a nightmare and there were lots of accidents. All other strategies (such as fines, arresting offenders and impounding their vehicles) adopted to combat the issue were fruitless so a new strategy was developed by the governor. He set up a policy that traffic offenders would be sent to a psychiatric hospital for mental check up. This reduced breaking of traffic rules by up to 80%

    • Alex Oprunenco

      haha:) this is a nice one…how many were released after the check up? 🙂