The team of researchers demonstrated that by structuring the messaging in the right way, low and moderate-income taxpayers can be encouraged to save their tax-refund for long-term needs or unforeseen emergencies.
As the W-2s are arriving and taxpayers are preparing to file their 2017 federal income taxes various questions arise since 80 percent of these taxpayers are persuaded they will receive a refund, but what happens next will be unforeseen.
Will taxpayers immediately absorb their tax refund into short-term expenses? Or can they be persuaded to save it for more long-term needs or as a rainy-day fund?
In two separate experiments, researchers found one way of stimulating savings of nearly $500 on a $1,000 refund and savings of some $300 more than the control group studied.
The team consisting of faculty from Olin Business School, the Brown School, the University of North Carolina at Chapel Hill, and Duke University worked with a collection of nearly 650,000 online tax filers to determine what interventions might effectively guide taxpayers to save their returns.
The study was part of the tax-refund to Savings Initiative, which took place in collaboration between Washington University, Duke University and Intuit, Inc., the makers of TurboTax.
Cynthia Cryder, associate professor of marketing at Olin said, “Low-income individuals usually have pressing financial needs for whatever refund they can get.”
“That means it is quite a challenge to design interventions that move the needle on savings outcomes.”
The research is particularly topical now, as taxpayers gear up to file their 2017 taxes. It also comes in the shadow of tax reform legislation recently passed in Congress and signed by President Donald Trump.
Michal Grinstein-Weiss, professor and associate dean for policy initiatives at the Brown School said, “High-income households really benefit greatly from the current tax code, where they get large subsidies for mortgage interest deductions, retirement accounts, and other benefits.”
Meanwhile, she added, “lower-income households received very modest subsidies in the tax code.”
Through the Refund to Savings Initiative, the team partnered with Intuit over the past five years to target millions of qualified users of Intuit’s free online income tax filing program, TurboTax Freedom Edition, as they filed their taxes. In their 2015 experiment, the researchers used behavioral economics techniques and varied the messaging that almost 650,000 taxpayers received when asked how their tax returns should be handled.
In some cases, the researchers varied the choice layout that taxpayers viewed for handling a tax return the “architecture” of the choices. For some taxpayers, the “choice architecture” might have been very basic as send a paper check, direct deposit to a bank account (which could include a savings account), or split the refund into multiple accounts.
For other taxpayers, however, the architecture mentioned savings more directly, specifically asking whether the refund should go to a savings account, or offering to help to create a savings account.
In other treatments within the field experiment, researchers varied the nature of the messages that taxpayers received, suggesting future uses for their returns such as retirement, emergency funds, car purchases or education.
As it turns out, every intervention the researchers tested resulted in more savings versus the control group, which received no interventions.
In one intervention, for example, where savings were made salient both via choice layout and messaging, taxpayers saved nearly $84 per person more on average than the control group.
Grinstein-Weiss said, “What is important about this study is that an intervention of a few seconds can lead to a large impact.”
In a second experiment, a small number of consumers considered a hypothetical $1,000 refund and offered different options, including a recommendation to save for an emergency “rainy-day” fund. The results showed taxpayers would have saved an average of $486 per person about $307 more than the control group.
A third experiment also addressed a smaller subset of consumers with another hypothetical $1,000 tax return, testing a variety of strategies for emphasizing “saving” as an option. “Heavily emphasizing ‘saving’ or making ‘saving’ a simple one-click decision both increased savings,” the researchers wrote. “Simply making ‘saving’ explicit among (the choices) was not sufficient to increase savings deposits.”
Cryder said their research is continuing with data from 2016 tax filers and will again with people who file their 2017 taxes.
The current research, Cryder said, “is suggestive, but not conclusive, of the benefits of highlighting savings.”
“We know that people not having short-term savings is incredibly stressful, and these interventions increased short-term savings. What we don’t know for sure is whether it actually decreased financial stress.”
The next steps in the research will look at what outside forces might influence decisions low- to moderate-income taxpayers make when dealing with their returns.
Cryder asked, “What is the best use of money for people using their taxable income in terms of financial well-being and overall stress?” and “How can we encourage them to do that with their money?”
Grinstein-Weiss agreed, noting that clearing debt may, in some cases, be the best use of tax savings and that’s likely the key question researchers will tackle in the next tax season’s research.
Grinstein-Weiss said, “It was encouraging that you can get so many people to save at tax time.”
“It makes me feel like more of these companies should do things like this and encourage people to save.”
This research paper is set for publication in the next issue of the journal Behavioral Science & Policy.