Publish Tax Returns

Our simplest model of an economy is: supply and demand. This model has many simple implications for policy. Now we know of many much more complicated economic models, which often have quite different policy implications. But often we are not sure which more complex models actually apply well to any given situation. So we have to worry that people favor more complex models mainly to justify their preferred policies. Knowing this pushes me toward weakly recommending the policies implied by supply and demand, unless I see unusually clear evidence to support a different economic model. (FYI, the evidence that fixed costs exists seems plenty clear, so I really mean supply & demand with fixed costs.)

In our simplest modes of information, people are better off when they have more information, and also when information is distributed more symmetrically. There is a vast world of much more complicated models, but it is often hard to tell which more complex models apply well to given situations, and many probably favor particular models to justify preferred policies. So as with supply and demand, this uncertainty pushes me to weakly favor the simplest info models, and their policy recommendations favoring more info and more symmetric info.

Now we do have some relatively clear exceptions where privacy seems a better policy. For example, it is better to not let extortionists know that you know that they’d actually carry out threats. Private keys and passwords are powerful tools for protecting property from theft. Many place large values on privacy re their naked bodies, and such info typically has much less value to others. And to create incentives to discover info, we often need to let people keep that info secret, at least until they make key sales or trades.

Most other cases, however, are much less clear. Which usually pushes me toward favoring openness, transparency, and symmetry of info, as these are the implications of our simplest info models. Which brings us to recent proposals to make all tax returns public, such is now done in Norway, Finland, Sweden, and Wisconsin, and such as we now do with US property taxes. The US tried this for income taxes for the first ten years after they were imposed in 1861, and also in 1924:

In October 1924, the federal government threw open for public inspection the files that recorded the incomes of American taxpayers, and the amounts they had paid in taxes. … Journalists soon began to note the curious absence of some conspicuously wealthy people from the lists of top taxpayers. Congress had ordered the disclosure as a weapon against tax fraud. … There is every reason to think that sunlight served the desired purpose. One important piece of evidence is that wealthy Americans absolutely hated the disclosure law, and soon persuaded Congress to execute a U-turn. (more)

Reducing tax evasion seems a substantial benefit to this policy; in 2010 US Federal tax revenue was cut by 14% due to tax evasion. Offering bounties to anyone who showed a tax fraud would increase this gain. In addition, a Twitter survey I just started suggests that over 80% of people would not be willing to pay 1% of their income to keep their taxes private. This suggests the policy can pay for itself in in tax terms alone. Other purported benefits:

Disclosure also could help to reduce disparities in income … Inequality is easier to ignore in the absence of evidence. … Public corporations are required to report the compensation of top executives — who check disclosures of rival companies to ensure they are not underpaid. … Another benefit would be identifying patterns of illegal discrimination against women or minorities. … People who know how much their co-workers are paid — and how much people are paid at other companies, and in other industries — can make better career decisions. Tax data also is a rich source of information about American life. (more)

Tyler Cowen, however, disagrees:

The world can figure out a lot about the rest of your life [from your taxes] … Let’s say, for instance, that you just got out of prison — should that be commonly available public information? … Let’s say … you haven’t yet had a high-paying job. With tax-record publication, it will be harder to pitch yourself as a quality hire with upside potential. … [In] the dating market, tax transparency would give high-earning men and women a bigger advantage and hurt their lower-earning competitors. …

Is it better if your parents and all your friends can see how well your new job is going or how much in royalties your last book earned? As it stands, … your close associates assume the best or at least give you the benefit of the doubt. … [Norway] tax-record publication … “negatively affected the well-being of poorer Norwegians while at the same time boosting the self-esteem of the rich.” …

Residents in poor zip codes pay higher premiums, even after adjusting for their level of risk. If insurers had data on everyone’s exact level of income, these kinds of discrimination might become worse yet. … Let’s say you have medical expenses high enough that they are deductible against taxable income. All of a sudden, the whole world will know that you were sick, and how much you were spending to get better. …

Presumably your tax-deductible charitable contributions would become public information as well, including which religious institutions you gave to. Many people give away large sums of money to charities, but do so anonymously to avoid being deluged with requests for money and fawning sycophants. Making it harder to donate anonymously probably would result in fewer charitable contributions. (more)

Anonymous donations are a tiny fraction of charity overall, and protecting rich folks from being bothered by charity requests seems a pretty small consideration. Insurance market usually get more efficient when insurers know more about customers, as do labor markets when workers know more about wages. Re Norway happiness, no net harm was shown, just some doing better and some doing worse. Re showing off to mates etc., more visible income would make people try harder to gain higher income, and try less hard to display income via clothes, cars, etc.; that seems a win to me. And the rest of Cowen’s objections are about the privately perceived value of privacy, which must be small if people aren’t willing to pay much for it, as suggested by my survey.

I’m open to seeing stronger effects, but so far my usual presumption for symmetric info plus apparently large corruption-detection advantages here lean me to tentatively favor publishing tax returns.