Appealing, Threatening or Nudging? Assessing Various Communication Strategies to Promote Tax Compliance

Abstract

This study examines the effect of various communication strategies on wage underreporting and tax compliance. Employing a field experiment with 3,813 businesses in Latvia—a country marked by substantial wage underreporting—this research utilizes advanced data analytics to disseminate messages from the tax authority to firms whose declared wages substantially lag behind industry and regional averages. Messages ranged from normative appeals to audit probabilities and nudges. The immediate result was a notable increase in compliance in the first four months after the intervention, with firms elevating average wage levels. While the specific content of messages did not result in distinct long-term compliance behavior, the overall effectiveness of sending messages was affirmed. We identify a message combining 5% audit probability with normative appeals as the most effective one in enhancing tax revenues and triggering minimal negative feedback from the message receivers.

Keywords: tax collection, shadow economy, prosocial behaviour, tax audits, minimum wage

JEL Classification: C93, D03, D22, H26, H32, H83