Using Behavioral Science to Increase Revenues. and Compliance. Ted London, Vice President, CGI. Date: August Manufacturing

Transcription

1 Using Behavioral Science to Increase Revenues Manufacturing and Compliance Ted London, Vice President, CGI Date: August 2012 _experience the commitment TM

2 Agenda Background: Not all decisions are made rationally MINDSPACE: Why do people make decisions Strategies to use this in Tax Administration CGI Proprietary and Confidential 2

3 People do not always respond rationally when faced with choices Economists and others historically built models based on people making rational decisions i Models were proven wrong New field of behavioral economics was born Many things influence decisions Perceived freedom to make choices Relative cost and benefit of those choices Number of choices Much of what you do as tax administrators is to get people to change their behavior CGI Proprietary and Confidential 3

4 Relativity in Decision Making Expected Cost: $20 Sale Price: $15 (15 Minutes further away) CGI Proprietary and Confidential 4

5 Relativity in Decision Making Expected Cost: $20,000 Sale Price: $19, (15 Minutes further away) CGI Proprietary and Confidential 5

6 The value of a third choice Price 1. On-line only subscription $59 2. Print and web subscription $125 Selection 68% 32% CGI Proprietary and Confidential 6

7 The value of a third choice Price Selection 1. On-line only subscription $59 16% 2. Print and web subscription $125 84% 3. Print only subscription $125 0% CGI Proprietary and Confidential 7

8 A third choice as a decoy Honeymoon in Rome, including airfare, 4 star hotel, transportation from the airport to the hotel, buffet breakfast every morning: $4,000 Honeymoon in Paris, including airfare, 4 star hotel, transportation from the airport to the hotel, buffet breakfast every morning: $4,000 Honeymoon in Paris, including airfare, 4 star hotel, no transportation, no breakfast: $3,980 CGI Proprietary and Confidential 8

9 The power of a smile Energy bills with emoticons showed greater energy savings than ones without Generally the issue is not providing enough information, but how to present that information CGI Proprietary and Confidential 9

10 Emoticons in Tax Administration Utah Individual Income Tax Forms CGI Proprietary and Confidential 10

11 Agenda Background: Not all decisions are made rationally MINDSPACE: Why do people make decisions Strategies to use this in Tax Administration CGI Proprietary and Confidential 11

12 MINDSPACE How to influence people Messenger Incentives Norms Defaults Salience Priming Affect Commitment Ego Who delivers the message Are there any positive or negative encouragements to make a decision What do we perceive others are doing Pre-set options can increase compliance Does the message get our attention Subconscious items that get our attention Emotional associations can affect our decision Our we committed to our agreement We all want to make decisions that make us feel better Dolan et. al (2009), MINDSPACE, Influencing behaviour through public policy, United Kingdom Institute for Government. CGI Proprietary and Confidential 12

13 Messengers Who delivers the message is almost as important as what the message is Think of television commercials for drugs where the actor wears a lab coat Public service announcements given by famous actors or political figures Who would be the best messenger for tax administrators? CGI Proprietary and Confidential 13

14 Incentives Many factors can lead people to not act fully rationally: Disproportionately factor losses over gains Place too much likelihood in small probabilities Conceptually place money into groupings g Very high discount for money in the future CGI Proprietary and Confidential 14

15 Norms People are driven by what others do People like to hear the word yes the word no makes them anxious Tell people p they are in the norm (when desirable) Be as specific as possible Be careful when dealing with undesirable norms Try not to communicate cases where non-compliance is the norm CGI Proprietary and Confidential 15

16 Norms (an example) A recent study by a hotel chain found: A sign was added to the room asking people to recycle their towels: 35.1% recycled The sign was changed to say that that most guests at the hotel recycled their towels at least once during their stay: 44.1% recycled The sign was changed to say that the immediately prior occupant of the room had reused towels at some point during their stay: 49.3% recycled CGI Proprietary and Confidential 16

17 Defaults Behaviors change when you help put that behavior on auto pilot Automatic 401(k) enrollment has increased typical usage from 70% to 95%+ Employer withholding high compliance rates District of Columbia new approach to withholding for delinquent taxpayers EFT for delinquent payment agreements CGI Proprietary and Confidential 17

18 Salience People pay attention to what they notice and what they can understand For specific non-compliance issues are the instructions visible, noticeable, and understandable Plaintalk lk for letters Re-writing one letter in Washington State tripled number of businesses voluntarily paying use tax from 3% to 9% Letters are written from an internal perspective (e.g., legal sufficiency, barcodes, etc.) need to look at how the taxpayer will react to the letter Remember people focus on losses Anchoring a minimum can drag repayments down 435 bill: repayment on average was 99 when a minimum payment was shown; 175 when no minimum payment was shown CGI Proprietary and Confidential 18

19 Priming Words Use of words to subconsciously get the desired behavior (honest, timely, satisfied) Sights Smiley faces Portion sizes Smells Fresh cookies at an open house CGI Proprietary and Confidential 19

20 Affect Emotions can sway decisions This is your brain on drugs Negative emotions have a stronger effect than positive emotions Emotional appeals can be too strong We block out messages when the emotional response is too strong CGI Proprietary and Confidential 20

21 Commitments Door-to-door sales people ask their customers to fill out the commitment forms (not just sign) In a test, an insurance company asked their customers to sign at the top of the declaration form 2,747 Miles difference Commitment devices can change behavior CGI Proprietary and Confidential 21

22 Ego People have a subconscious desire for a positive self-image (some call this a superiority bias) Studies showing men will donate more to attractive women Greater internalized expectations also lead to a higher likelihood of behavior People who have been compliant longer will have higher expectation for themselves Consistency also affects ego Use strategies to get agreement on something small before asking for something larger CGI Proprietary and Confidential 22

23 Ego perceptions Garrison Keillor reports that in Lake Wobegon that all the women are strong, all the men are good looking and all the children are above average Dr. Ola Svenson conducted a survey of 161 students in Sweden and the United States, asking them to compare their driving safety and skill to the other people in the experiment For driving skill, 93% of the US sample and 69% of the Swedish sample put themselves in the top 50% For safety, 88% of the US group and 77% of the Swedish sample put themselves in the top 50% CGI Proprietary and Confidential 23

24 Agenda Background: Not all decisions are made rationally MINDSPACE: Why do people make decisions Strategies to use this in Tax Administration CGI Proprietary and Confidential 24

25 Strategies to use this in Tax Administration Changing text in letters Self-Service Payment Agreements EFT for Payment Agreements Communicating Audit rates and results Providing Choices to Taxpayers CGI Proprietary and Confidential 25

26 Changing Text in Letters (Incentives, Norms, Salience, Priming) Easy to understand language Point out the negative consequences When most people do the right thing tell them View text of letters from an external focus All too often letters are written with an internal focus Select word choices consistent with the behavior you desire Test various wordings of new letters CGI Proprietary and Confidential 26

27 Changing Text in Letters (Norms, Salience, Priming) Example from the UK s National Tax Agency HMRC: Adding the sentence, Nine out of ten people pay their tax on time. Increased the positive response to the letter within 30 days by 0.9% Adding the sentence, Nine out of ten people in the UK pay their tax on time. Increased the positive response to the letter within 30 days by 1.5% Adding the two sentences, Nine out of ten people in the UK pay their tax on time. You are one of the few people who have not paid us yet. Increased the positive response to the letter within 30 days by 3.9% Adding the two sentences, The great majority of people in (the name of the city on the address) pay their tax on time. You are one of the few people in the area who have not paid us yet. Increased the positive response to the letter within 30 days by 6.8% CGI Proprietary and Confidential 27

28 Self-Service Payment Agreements (Commitments, Ego) Many States have implemented self-service payment agreements Feedback has shown that these agreements have a lower default rate than ones taken by collectors Lower risk taxpayers Taxpayers implicitly provide commitment CGI Proprietary and Confidential 28

29 EFT for Payment Agreements (Defaults) Our experience shows that in the private sector all payment agreements for delinquent taxpayers are done through electronic pull methods The US GAO reported default rates for State tax payment agreements dropped from the 40-50% range to the 3-5% range using EFT CGI Proprietary and Confidential 29

30 Communicating Audit rates and results (Incentives, Norms, Salience, Priming) Don't be afraid to communicate low audit rates to individuals People will overestimate the risk in their mind Do find an appropriate way to communicate the consequences from the audit Tell people e that most do the right thing Consider who would be the best messenger? CPA, individual taxpayer Use words that are consistent with the desired behavior CGI Proprietary and Confidential 30

31 Providing Choices to Taxpayers (Incentives, Commitments, Ego) Don t forget the power of threes Applies to both notices, self- service tools and staff interaction People are unlikely to pick the most expensive entrée Opportunities to appeal to their ego Signing payment agreements is likely to increase compliance with the agreement CGI Proprietary and Confidential 31

32 Consider Random Trials Studying behavior is an imperfect science Your agencies have literally 100s of interactions ti every day and 1000s every month Trying different strategies and testing them can lead to dramatic improvements What would the impact on your organization be if: Payment in full from first notices increased by 5% Defaults on payment agreements decreased d by 10% 10% fewer taxpayers went into collections 10% of the most common filing mistakes were no longer made CGI Proprietary and Confidential 32

33 Selected Bibliography Ariely (2009), Predictably Irrational, Harper Collins. Ayres (2010), Carrots and Sticks: Unlock the Power of Incentives to Get Things Done, Bantam. Dijksterhuis and van Knippenberg (1998), The Relation Between Perception and Behavior, Journal of Personality and Social Psychology. Dolan et. al (2009), MINDSPACE, Influencing behaviour through public policy, United Kingdom Institute for Government. Nobel (2011), Signing at the Top: The Key to Preventing Tax Fraud?, Harvard Business School Working Knowledge. Rao (2005), The Quality of Price as a Quality Cue, Journal of Marketing Research. Svenson (1980), Are We All Less Risky and More Skillful than our Fellow Drivers, North Holland Publishing Company. Thaler and Sunstein (2008), Nudge: Improving Decisions about Health, Wealth and Happiness, Yale University Press. Wakefield, Loken and Hornik (2010), Use of mass media campaigns to change health behaviour, Lancet. CGI Proprietary and Confidential 33

34 About the Presenter ISO 9001 Certified Ted London Vice President Tax and Revenue Solutions (916) Years with CGI exclusively working with State, Federal and Local tax agencies Leader of CGI s Global Tax and Revenue Practice Experience with more than 20 different tax agencies Experience with enhancing collections, audit and tax accounting systems and business processes Oversees estimation and measurement for CGI s benefits funded tax projects CGI Proprietary and Confidential 34