The debate over whether President Donald Trump’s tax returns should be released has raised the question whether all tax returns should be publicly available. This idea has been suggested recently by Binyamin Appelbaum of The New York Times and also Matt Yglesias of Vox. In Norway it has been policy since 1814 and Finland does something similar.
I’m afraid, though, that universal tax transparency would boost U.S. economic inequality, take away second chances and devastate privacy.
The general problem is this: Once the information about your earnings and possible tax deductions is public knowledge, the world can figure out a lot about the rest of your life, often to your disadvantage. Let’s say, for instance, that you just got out of prison — should that be commonly available public information? Well, those gaps in your earnings records are hard to explain otherwise. As it stands, we’re making good progress toward giving released prisoners second chances, and this could reverse the trend.
Similar problems would damage the interests of many people coming from other tough circumstances. Let’s say you’re a hard-working, scrappy and ambitious young person, but you never went to college and 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. Everyone can look and see that you haven’t been paid much in the past.
Of course, this problem already is present in the status quo, but published tax returns would make it harder to bluff or use ambiguity to your advantage. It is the clever poor and uncredentialed who will suffer. More generally, it is individuals who will lose bargaining power and hiring businesses who will gain it. Is that so wise in an age when wage growth has been sluggish?
Or think about the dating market. Tax transparency would give high-earning men and women a bigger advantage and hurt their lower-earning competitors. Do we really wish to do that in an age of growing income inequality and diminished upward mobility?
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, we exist in a slightly more comfortable social equilibrium where your close associates assume the best or at least give you the benefit of the doubt. Transparency of earnings would increase stress and make failure and disappointment all too publicly evident. Or entrepreneurs with long-term projects which are going to make it — but not right away — might face too many social or family pressures to quit.
Snooping through the tax system would definitely happen. Evidence from Norway indicates that in 2007, 40 percent of Norwegian adults checked somebody’s tax information online, higher than the penetration of Facebook in Norway. Anonymity of the snooper was removed in 2014, and visits fell dramatically (88 percent by one measure), but still you can imagine paying others to snoop for you or the information eventually getting out over time.
The result of tax-record publication was that “this game of income comparisons negatively affected the well-being of poorer Norwegians while at the same time boosting the self-esteem of the rich,” according to Ricardo Perez-Truglia, a UCLA economics professor writing last week in VoxEU. There’s even a smartphone app that creates income leaderboards from the data on your Facebook friends.
Your insurers will be interested in this information as well. It’s already the case that 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.
Or consider your medical privacy, which is not always as separate from your financial privacy as you might think. 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. Some medical providers might even end up deciding to charge you more. Those all seem like unacceptable privacy violations, especially in an era where privacy concerns seem to be growing.
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.
The U.S. has one of the most complicated tax systems in the world, requiring an exceptional degree of disclosure of personal information. For that reason, publicly available tax information would do more to violate privacy and opportunity here than just about anywhere else.
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