Tuesday, March 25, 2014

Make Tax Returns Public

       How about this as a way to increase government revenue, reduce crime, raise economic efficiency, and increase civic virtue:  make  everybody’s tax returns public. If it’s public information that Mr. Smith is reporting only $34,000 in income from his roofing business, but the neighbors know he lives in a $400,000 house, it would be easy for a neighbor to pass along his suspicions to the IRS.  Suspicious amounts of business travel expenses by someone who never seems to leave home, returns filed in the names of dead men, sizeable charitable giving by a notorious skinflint, filing of Texas state taxes by someone who lives in California, a red ink year for a thriving small business, sabbatical living deduction by a professor who never left town… the possibilities are endless.  We would be crowdsourcing tax compliance, or at least pointing out to the IRS where to focus its energies.

What about privacy?

  Privacy is a slippery term. It’s true, it would become harder to cheat on your taxes, but I hope nobody objects to that. And other secrets would be exposed. You couldn’t lie to the court and your ex-wife about how much you can afford to pay in child support.  You might get turned in for welfare fraud when people see how much you’re making while collecting food stamps and living in Section 8 housing.  You’d be exposed as tight with your money if you itemized and had no charitable deductions, or as a poseur if you were engaging in conspicuous consumption beyond your means. In all of these cases, though, the effect would be to improve information by exposing liars. The liars would lose, but honest people would correspondingly gain--- and gain more, since making information less asymmetric generally raises total surplus.

    I can only think of two groups of people with valid privacy concerns.  First, criminals. Prostitutes, hit men,  and drug dealers are all required to pay taxes on their illegal income, and in return the IRS keeps the information secret from the police. We would have to exempt illegal income from the publicity requirement, or we couldn’t tax it. Second, people who are surprisingly rich. Lists of high earners would be a good source of targets for thieves and kidnappers.  To a great extent, however,  it is already easy to compile long lists of rich people.  Public real estate records, for example, show who lives in expensive houses--- as, indeed, does the neighborhood itself.

   To deal with these and other valid reasons for privacy, however, we could modify my publicity proposal. Add to it that someone can keep his tax return private if he is willing to pay an extra 20% in taxes--- that is, pay $12,000 in taxes instead of $10,000--- with a minimum payment of $1,000.  This would keep many of the advantages of public disclosure. In particular, anyone who  pays the surcharge has thereby shown he has something to hide. The IRS can use that information in deciding who to audit. And everyone else would know that something interesting is happening in that person’s finances.

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Comments

I don't engage in illegal activities and I report all my income. However, I don't want busybody neighbors or relatives, scam artists, charities, or vendors having knowledge of my income and assets (which can be estimated from my tax return). I don't want to be the subject of gossip or loan requests, targeted for identity theft, badgered for contributions, or charged based on ability to pay. You may not consider those valid privacy concerns, but I most certainly do. A 20% surtax to preserve my privacy seems a very high price for me to pay because others are evading taxes.

Posted by: Jerry | Mar 27, 2014 6:48:54 PM

1. I can understand why you'd want to keep these things private, but at the same time other people would like to know them, so the question is why your desire for secrecy should dominate.
2. It might not matter that much to these things. Your credit report and the value of your house are already available, which is why we already get lots of junk mail for credit cards. Maybe there's a way to keep your credit report secret, but I can't think of a way to keep the value of your house secret. You could set up a trust to be the owner of record, but people could still see that you live in a house of a particular value, and get a good estimate of your wealth.

Posted by: Eric Rasmusen | Apr 2, 2014 7:56:24 AM

"I can understand why you'd want to keep these things private, but at the same time other people would like to know them, so the question is why your desire for secrecy should dominate."

What is the rationale for asserting that the nosy neighbor, the ne'er-do-well relative, the aspiring identity thief, the donor development officer, and the car salesman have interests in my financial data that are on par with mine? The fact that they would like to exploit my information for their own benefit?

What does that have to do with your claimed reasons for making tax returns public--exposing tax evaders, deadbeat dads and welfare cheats, and shaming those who are uncharitable? (With respect to the last, I'm very skeptical. One need only look at politicians who know their tax returns will be made public, e.g., a certain politician whose tax return showed a rather lean 1.87% of income given to charity in 2012.) You seem to think that my surrender of personal privacy for public purposes is a worthwhile trade-off, but I don't believe you've made a very convincing case. I highly value what Brandeis called "the right to be left alone" and would deeply resent being forced to pay a penalty (protection money) to preserve it.

"It might not matter that much to these things. Your credit report and the value of your house are already available, which is why we already get lots of junk mail for credit cards."

I would point out that the financial information in a credit report is not as readily available as would be the data in public tax returns. There are some controls (probably not enough) and costs associated with accessing the former, which prevent a nosy neighbor and others from easily looking up my credit rating or income.

"Maybe there's a way to keep your credit report secret, but I can't think of a way to keep the value of your house secret. You could set up a trust to be the owner of record, but people could still see that you live in a house of a particular value, and get a good estimate of your wealth."

An estimate (or over-estimate) of wealth might be made for those who live at (or above) their means, but not everyone who's got it, flaunts it. Many with wealth live in very ordinary houses and drive very ordinary cars. Most of their assets may not be visible, e.g., in financial instruments or business ownership. Although it's nearly two decades old, much of "The Millionaire Next Door" demonstrates my point, and I would wager its findings are still valid today. If someone wishes to live simply, what business is it of government to essentially say, "Look, everybody! Here's someone with money!"

Posted by: Jerry | Apr 3, 2014 10:16:27 PM

The First and Fourth Amendments to the Constitution stand in the way. The IRS has a legitimate purpose for that information, but no one else does. If the government is going to compel speech, they need a compelling interest and the least restrictive means of doing it. My neighbor's voyeuristic curiosity is not going to pass the test.

Posted by: Phil | Apr 17, 2014 11:47:26 AM

I don't see that the 1st and 4th amendments are relevant. Back in the 1910s or 20s, income tax returns *were* public information, and I don't recall there being any constitutional objections.
Do you think it's unconstitutional that a person's land ownership, or his property tax bill, or his arrest record, or his record of involvement in lawsuits is public information? All that has been public since the start of the USA.

Posted by: Eric Rasmusen | Apr 18, 2014 2:26:27 PM

I do not think those comparisons are valid. Whether one commits a crime is a violation against the state and the community has a legitimate reason to know that information. The owner of a particular parcel of property is often information that needs to be publicly available so that private property and public property can be distinguished. The civil litigant's case may serve as precedent for a future litigant who has a valid right to know how my case was decided. All of those are public actions. But information about whether (or how much) my personal money was donated to a particular church serves no public purpose. Not every interaction with government ought to be public. Let me ask you this: should my neighbors also review my Veterans Administration medical record to make sure I have not perpetuated a fraud against the VA by claiming a disability I do not actually have? If so, then they should put Grandma's medical record up there too to make sure she really has a prescription for those pain meds Medicare bought. And should we also post online all the grocery store receipts for all the people who receive SNAP benefits? My son's public school records to make sure he reimbursed the school for the library book he misplaced? I think a transparent government is good, but personal information in the hands of government should be made transparent only if it serves a significant or compelling purpose.

Posted by: Phil | Apr 19, 2014 11:06:25 AM

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