Should Tax Returns be Publicly Accessible?
In the US, in light of the discussions regarding whether President Trump’s tax returns should be made public or not, a new debate has begun regarding universal tax return disclosure. Proponents of the view argue for universal disclosure of all tax returns, meaning that everyone’s financial information in the tax returns, including their identity, should be made publicly accessible. This has been the policy in Norway since 1814. The default system in most countries, including the US, is that tax returns are not public information and only government has access to them.
This is an important public policy issue and can have wide ranging consequences based on how the debate plays out, especially during a time when concerns of inequality in society has pushed many in the society to embrace more radical positions. However, in this article, I want to articulate and compare the arguments on both sides of the debate.
The Arguments on Both Sides
Before moving to the arguments, it is important to mention that making tax returns public can be done in different mechanisms, with different rules. For example- it can be completely transparent and accessible (so anyone can access the information from anywhere, without revealing their own identity), or it can be a two-way information sharing where the identity of the person/ organization who is seeking the information is also made public. For the arguments below, we assume the system to be later.
The principal argument for universal disclosure is increased transparency and more transparency can never be bad. A common saying goes- “ Secrecy is of the greatest aid to corruption.” Hence, if tax information is made public, the public will have more information regarding others’ earnings and tax payments/credits, which can be used to verify a number of things, including whether people have reported their earnings correctly, whether claims made by people are correct or not, etc. This vast pool of financial information will also shed light on important public policy issues such as inequality in society, gender wage gap. With more concrete evidence, these issues will be discussed with better quality data and can be duly addressed.
However, we value privacy of individuals and having increased transparency might also hurt the most disadvantaged in the society, the most. There is an argument to be made for preserving individual privacy, specially given that tax returns contain a lot of personal information and by analyzing the financial information like income each year, a lot can be inferred about the life of the person. For example, for someone who was sent to prison or for some reason did not have earnings for certain number of years, by analyzing that person’s tax returns over the years, a gap in earnings can be interpreted by potential employers as that person being unemployed or lazy or even as a felon. This will take away second chances from people who need it the most.
Moreover, for people who have taken risks and failed, will face more social pressure and stress as their information will be public. For example- for entrepreneurs who took risk and lost money, or are betting for long term success, will face more social and family pressures to quit.
Making tax information public will also decrease the bargaining power of the disadvantaged, in wage negotiations. Imagine for a young person, who has not been paid highly in previous positions, but improved his skill-set and wants to get paid more in a new job, has less bargaining power with new employers because they can simply go check the past wage information and pay you similarly. In the status-quo, the young person already has less bargaining power, but now, it is even more reduced.
Moreover, for people with lower income, insurance will get even more expensive because the insurance companies can access the financial information and raise the insurance premium for people with lower income jobs. That is already the case, but the discrimination will be even higher with the public income information.
The benefit of having better data publicly available to discuss other important issues can also be achieved without universal tax return disclosure. Anonymized tax data, where personal identity of the people are not revealed, has already been used for economics research, by economists such as Raj Chetty. Such anonymized data can be made public for research purposes.
Another argument for universal tax return disclosure is that it will encourage rich people to pay higher taxes because one inevitable consequence of making the information public is creation of a list of highest tax payers in society. Hence, rich people will be incentivized by the public recognition (assuming that society applauds the highest tax payers). But, highest tax-payers can be recognized by the government, without making all the tax returns public. This is already the case in number of countries.
But the benefit of universal tax return disclosure is not simply incentivizing rich people to pay higher taxes, but it also enables journalists and others to identify the rich people who are missing from the highest tax payers list, and hold them accountable. While this might be true, an unintended consequence can also be that this law would discourage people to file their tax returns at all whose incomes are rising, or encourage rich people to simply move to a country without the law (this is called ‘tax arbitrage’). Hence, as a result of this law, tax revenue might even decrease in the long run as more rich people, who would face increased scrutiny and public scorn for their high income, will decide to live in a country without the universal tax return disclosure law.
What do I think?
Given the arguments mentioned above, I am leaning on the side of being against such universal laws. However, I do think that a number of other things can be done to increase transparency. For example- it can be made mandatory for public officials to disclose their tax returns if they want to stand for election; companies can be mandated to disclose anonymized information about wages of different levels of employees, etc. Most importantly, we should always think hard before advocating for a new position in response to something that is only relevant to one person (in this case, President Trump’s tax returns).
(P.S. The arguments are based on two articles; https://www.nytimes.com/2019/04/13/opinion/sunday/taxes-public.html? ; and https://www.bloomberg.com/opinion/articles/2019-04-15/tax-returns-shouldn-t-be-filed-in-public )
