Taxation and Nudging

Abstract

This chapter examines the contributions behavioural economics in general and ‘nudging’ in particular can make to improving compliance with tax systems. Two broad approaches to promoting tax compliance are identified, one based on the assumption that taxpayers make ‘rational’ economic decisions with respect to their legal obligations and the other involving an understanding of a wider range of factors influencing taxpayers’ behaviour. It is shown that behavioural insights and ‘nudging’ have considerable potential to improve tax compliance further without some of the disadvantages that can be associated with an approach based on detection and penalties.