Tuesday, March 25, 2014
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.