Sunday, November 17, 2013

Felling better about paying your tax? Thank an economist

Remember how you used to feel when you got a letter from the Tax Office?

Unless it contained a refund, you probably felt a bit like the late Sir David Frost, who memorably summed up the creed of Britain's Inland Revenue Service as: ''If we can bring one little smile to one little face today, then somebody's slipped up somewhere.''

It's not so much that the Tax Office doesn't know how to write nice letters, it's that those letters haven't made it easy to pay or submit the information that's needed. Until now.

Next week the Tax Office will go public with details of an extraordinary behind-the-scenes re-engineering of the way it interacts with the public.

It's borrowing ideas from Google, from behavioural economics and from psychologists. It even has some on staff.

Cheryl-Lea Field is the deputy commissioner in charge of service delivery (debt), which is another way of saying she is the chief debt collector.

She says the ATO used to be indifferent to the way its letters looked. It operated on the heroic assumption that ''because the law required people to do things they would'', she told me on the line from her Brisbane office.

It's a bit like economics. Until recently it overwhelmingly operated on the assumption that people did exactly what was in their interests. If it was in their interest to pay a bill on time they would, if it was in their interest to lose weight they would, and so on. That's all that mattered.

Until the incident involving cashews. In the late 1970s economist Richard Thaler had a group of graduate students around for dinner. While the food was cooking he brought out a large bowl of cashews.

''We started devouring them,'' he later explained. ''I could see that our appetites were in danger. After a while I hid the bowl in the kitchen. Everyone thanked me.''

And then it hit him. They shouldn't be thanking him if they really believed that human beings were rational. ''After all,'' he recalled in his biography, ''if we wanted to stop eating cashews, we could have done that at any time.''

With Amos Tversky and Daniel Kahneman (who went on to win the Nobel Prize in Economics) he founded the new science of behavioural economics. Its role was not to merely examine what people should do, but to examine what they actually did and identify the systematic ways it differed from what was rational.

As Field put it: ''Economists suddenly came to the conclusion that people don't act rationally.

So just because you say 'you have to pay on this date' or 'you have to lodge on this date', people don't necessarily do it.''

Taking the lead of Britain's Revenue Office (which got in quite early, perhaps stung by David Frost), the ATO has been quietly trialling different ways of asking for money.

It has set up a ''simulation centre'' in Brisbane to present pretend letters to real people and see how they react. It presents pretend web interfaces as well. Then, just as Google tests new search algorithms by randomly dishing them up to some customers and not others, it posts new letters to 1000 of its randomly selected customers and old ones to the rest.

The results, to be detailed in the Public Service Commission's state of the services report this month, are astounding.

Merely by removing some opening words and highlighting an ''amount due'' box, it has pushed up the response rate to one letter by 5 to 6 per cent. The phrase it removed was: ''Please disregard this letter if you have paid this debt in full in the last seven days.''

By including an extra phrase in a letter to small businesses it lifted their response rate 12 per cent. The phrase said most ''lodge on time''. It's also test marketing the phrase: ''Paying tax is a fair way for everyone to contribute to the Australian community.''

It's even changing the scripts it gives to its call centre operators. They have been told to state very clearly what the person calling them needs to do next, and repeat that statement at the end of the call.

The move to online tax filing will make fine tuning even easier. The ATO will be able to adjust its forms in real time. The Bureau of Statistics has found that people find it easier to fill in the census online even though it takes just as long with paper.

It's becoming easier to deal with government agencies because they are starting to treat us more nicely. They are absorbing the lesson reluctantly incorporated into economics - that we're not that rational, and we've got feelings.

In The Age and Sydney Morning Herald