{"id":491,"date":"2025-08-25T04:02:58","date_gmt":"2025-08-25T04:02:58","guid":{"rendered":"https:\/\/ubwp.buffalo.edu\/jopblog\/?p=491"},"modified":"2025-09-21T19:35:05","modified_gmt":"2025-09-21T19:35:05","slug":"the-tax-break-that-broke-the-habit","status":"publish","type":"post","link":"https:\/\/ubwp.buffalo.edu\/jopblog\/2025\/08\/25\/the-tax-break-that-broke-the-habit\/","title":{"rendered":"The Tax Break That Broke the Habit"},"content":{"rendered":"\n

Montevideo\u2019s Lottery for Good Taxpayers
<\/strong>In 2004, Montevideo, the capital of Uruguay, launched a pioneering program to reward punctual taxpayers by entering them into a lottery. The winners got a \u201ctax holiday\u201d: a full year without paying their municipal taxes.<\/p>\n\n\n\n

The idea was simple. Instead of threatening late payers with penalties, why not reward the good ones? After the country\u2019s worst economic crisis in decades, city leaders hoped this positive approach would boost compliance and, ultimately, revenue.<\/p>\n\n\n\n

It didn\u2019t work out that way.<\/p>\n\n\n\n

The Montevideo lottery covered four major taxes: property, vehicle, sewage, and a \u201chead\u201d tax. Eligible taxpayers\u2014those fully up to date\u2014were automatically entered. Winners were drawn at random, using Uruguay\u2019s national lottery system, and notified by letter to claim their prize.<\/p>\n\n\n\n

We had a unique opportunity to measure the effects. Because winners were chosen randomly, we could compare their future behavior to that of eligible non-winners. We also ran field and survey experiments to see whether simply knowing about the lottery changed taxpayers\u2019 intentions or attitudes.<\/p>\n\n\n\n

<\/a>The Surprise: Tax Holiday Winners Became Worse Taxpayers<\/strong><\/h3>\n\n\n\n

Instead of making people better taxpayers, the tax holiday made them worse<\/em>. Winners were significantly less likely to pay on time for up to two years after their holiday ended. On average, compliance fell by 3\u20134 percentage points among winners compared to non-winners\u2014despite both groups having perfect payment histories before the lottery.<\/p>\n\n\n\n

And telling people about the lottery without giving them a holiday? That didn\u2019t boost payment either. Whether we mailed flyers to eligible or ineligible taxpayers, the extra information had no meaningful effect on their behavior.<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

The figure compares on-time payment rates for eligible taxpayers who won a one-year tax holiday with those who did not (top panel). The shaded area marks the year winners were exempt from payment. Dots indicate the estimated difference in on-time payments between the two groups, with vertical lines showing confidence intervals. Before the holiday, both groups paid at similar rates. After it ended, winners were less likely to pay on time for nearly two years. No comparable difference appears among taxpayers who were ineligible for the lottery (bottom panel).<\/em><\/p>\n\n\n\n

Why Did It Backfire? The Power of Habit<\/strong><\/p>\n\n\n\n

Our evidence points to a simple but powerful explanation: the policy broke people\u2019s payment habits. For many in Montevideo, paying taxes meant getting a bill in the mail and walking to a kiosk to pay. Doing that over and over made it automatic\u2014a year without paying disrupted that cycle.<\/p>\n\n\n\n

We saw no drop in compliance among:<\/p>\n\n\n\n