The Limits Of Nudging: Why Can’t California Get People to Take Free Money?

The Earned Income Tax Credit supplements incomes through the tax code, awarding thousands of dollars each year primarily to low-wage workers with kids. But there’s a problem: a huge population of eligible workers fails to file their taxes and get the money each year.

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In 2018, the state of California and the California Policy Lab, an interdisciplinary think tank of scholars from various University of California schools, started trying to solve this problem, and they commissioned one of the most fascinating experiments in “nudging” we’ve seen in a while.

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Nudges are simple, low-cost interventions aimed at gently guiding people to make better decisions. For example, making retirement plans the default option when you join a job, which has been shown to significantly increase the likelihood you save more for retirement. The California Policy Lab and its partners decided it would try and nudge workers to claim the EITC by sending them letters and text messages. The solution seemed like a no brainer: inform people how they can get free money, and they’ll get that free money! If only it were that simple.

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“We found a very precise zero effect,” says Elizabeth Linos, a behavioral scientist at UC Berkeley who was also behind the study. Many of those who received the messages, she says, did visit the website advertised in the messages to help them sign up for the EITC. But in the end, they didn’t fill out the forms to receive their credit. They turned down free money. “We weren’t able to increase the rate at which people file for taxes and we weren’t able to increase the number of households that claim the EITC,” Linos says.

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Linos and Rothstein believe our tax system is too complicated, and that we should make claiming the EITC, and filing for taxes more generally, much simpler. Linos says the good news is that other countries provide examples of systems that don’t require mind-numbing paperwork to file for taxes or receive government benefits.

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A dark view of the findings might write off this population as doomed to poverty because of bad decision-making and self-destructive behavior. But psychologist Eldar Shafir and economist Sendhil Mullainathan suggest a more charitable lens, which they call the “psychology of scarcity .” Their research suggests the poor bear a unique cognitive burden that hurts their decision-making. They work long hours. They have higher stress. They’re consumed with thinking about paying their rent, getting their kids medical care, and putting food on the table. Shafir and Mullainathan find these stresses lower their “mental bandwidth,” and it might help explain why so many low-income Californians are turning down free money.

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