In what seems to be a eureka moment for the State Bank of Pakistan, they have finally decided to weigh on behavioural economics and have advised the government to use behavioural tools to nudge people towards voluntary tax payments and filing of income tax returns. That this advice, which comes now that behavioural economics is becoming mainstream, goes to show that the SBP is an intellectual laggard and not a leader. But better late than never!
BR Research is not the business of primary research, but this column has long been advocating the use of behavioural economics tools in public policy for both analysis of the problem/situation and policy formulation. In fact, when the World Bank caught on the bandwagon – as late as its World Development Report 2015 – BR Research wrote that the bank “has finally lent its ears to what behavioural economists have long been arguing: human beings are not rational or egoistic; nor are they more or less identical.”
In its commentary titled “Behavioral Insights for Resource Mobilization”, published in the just-released State of Economy report, the SBP draws on Richard Thaler’s theory that human behaviour is greatly limited by three puzzles: cognitive limitations, self-control problems, and their decision-making is greatly influenced by social preferences. (Read BR Research commentary on Professor Thaler’s work following his Nobel Prize win: ‘Give nudge a chance,’ published October 12, 2017)
Based on that, the SBP highlights four short examples of how behavioural change has been used elsewhere in the world to nudge people into paying taxes, and on time.
For instance, the British government sent out tax notices to its citizens that provoked a sense of commune either by notice to Britons that said, “The delinquent was in the minority”, or by pointing out that “tax is vital for funding services like provision of health care and construction of roads”. The Danish tax authority, on the other hand, found through using behavioural economics tools that its citizens were troubled by perceived complexity of tax procedures. Based on that finding, the Danes created a simplified human-centred platform for tax payment.
In Croatia, the tax body offered lottery on receipts of goods and services purchased, and disseminated the kind of messages that the British sent out. For example, linking formal economy with better provision of public goods, one message said: “every receipt you take is an assurance of a more organized society and a more secure future.” This kind of public message that shifts the understanding of tax as a ‘burden’ to ‘contribution towards public good’ has also been successfully implemented by Estonia.
The examples that the SBP has cited in support of its suasion for using behavioural tools are hard to argue with. But three responses need to be made here.
First, no amount of nudging will be useful if institutions and their governance are not reformed in Pakistan. The FBR doesn’t need to deploy behavioural tools to find that ‘Oh! The return filing system is complex’. It is complex, and that’s as obvious a truth as truth can be. Failed attempts over receipt-based lottery scheme go back to the last PPP regime. Special access to taxpayers on airports, among other benefits, has also existed on paper for some time in this country. Yet the growth in tax filers remains weak. Ergo, institutional reforms first; nudging later.
Second, Pakistani academia needs to develop its own cadre of behavioural economists, as well as non-economists, such as psychologists and decision-science experts who can research and implement policy recommendations in government, the third sector, and at companies too.
The reason why the need to develop home-grown cadre is paramount is because (a) behavioural economics is an evolving field; and (b) it is not a monkey-see-monkey-do field. Which means that standard business of copy-pasting IS-LM theories, Granger causation, and regression models will not cut out. It’s a field that requires a learning loop through experimentation which can best be done if local human capital is developed. (See also BR Research column: ‘Homo economics is dead; long live Homo sapiens,’ published December 3, 2014)
Lastly, and this will probably rub economic liberals the wrong way, but there is a need to explore nudging business beyond provoking a sense of commune or contribution towards the delivery of public goods. While behavioural tools in Pakistan can be applied to a wide range of areas such as fostering democratic values, moderation and tolerance, those involved with nudging should also take into account how priming the subjects with concept of God and religion has led to positive change in behaviour. Plenty of studies have been written on the latter subject (some of which have been cited in BR Research column: ‘The missing link in WDR 2015,’ published December 5, 2014.)
Following the spirit of Paigham-e-Pakistan, therefore, it should be explored just how bad of a sin it is to steal water from the neighbourhood pipeline, or stealing electricity, or cheating on taxes. On the face of it, an interpretation could be arrived at that when a person cheats on taxes or steals water/ electricity, that person is not stealing from one but millions of people across the country. A public announcement to that affect ala Paigham-e-Pakistan in itself could be a big nudge forward.
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