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Tax lotteries and Behavioural Insights in Europe

2nd Mar 2016

Last week, the European Commission published a report on the growing uptake of behavioural insights across the governments of Europe. You can read the report here.

One of the most interesting parts of the paper is on the growing use of tax lotteries in European countries. Lotteries or prize draws have long been of interest to behavioural economists, because people have a tendency to overweight small probabilities – or, to put it another way, we focus more on the prize (£50m!) than on the chances of winning (1 in 10 million chance).

This is of interest to policymakers because there are lots of situations in which it would be costly to provide financial incentives to entire populations (e.g. £1 for every time you do X). With a lottery, you don’t have to incentivise everyone. You just have to ensure that there is a suitably enticing prize that everyone has the potential to win.

Tax authorities in Malta, Slovakia, Portugal and Romania are using this principle to encourage people to ask for receipts when they buy goods or services. The idea is pretty simple: a lottery ticket is printed on the back of the receipt, which turns something that used to be a worthless piece of paper into a potentially valuable prize. At the same time, receipts, of course, help tax authorities to ensure compliance with certain taxes.

And, as Brigitte Madrian (the Harvard Professor giving the keynote speech at the launch of the European Commission event) points out, there’s good reason to suppose that lotteries might be effective at improving tax compliance. In a recent paper on a Brazilian scheme that created monetary rewards for consumers asking for receipts, Joana Narotomi concludes that the programme increased revenue reported in retail sectors by at least 22% over four years.

Here at BIT, we’re always interested in hearing about examples of policymakers using ideas from the behavioural sciences and putting them into practice. And one of the especially interesting things about this report from the European Commission is that it shows that governments, like people, are influenced by what others are doing. So we’d recommend you take a look at the report and do as it suggests: Test, Learn, Adapt and Share!