Investigating Tax Compliance with Mixed-Methods Approach: The Effect of Normative Appeals Among the Firms in Latvia

This study employs a field experiment and qualitative content analysis to examine the effect of various behaviourally-informed messages on increasing tax compliance in Latvia. In a field experiment, more than 3,000 businesses received a message with a normative appeal to increase the relatively low salaries compared to firms operating in the same industry and region. Other treatment groups received the same message with an additional paragraph that varied audit probabilities or included prosocial messages. All treatments effectively increased the average declared salaries in the enterprises relative to not sending a message. Even though the overall fiscal effect was positive, the qualitative analysis of the feedback by the firms indicates that messages, particularly those that did not state the future actions of the tax administration, provoked discontent and distrust between the taxpayer and the tax administration. Our findings demonstrate that clear communication of the intended actions of the tax administration is the most effective approach to promoting tax compliance. Furthermore, our research indicates that a relatively small audit probability (5%) is as effective as a larger probability (66%), implying that there is no need to carry out audits on a large scale to address tax evasion.