The Dark Side to Making Tax Returns Public
(Bloomberg Opinion) -- President Donald Trump has been able to stymie Democrats’ demands to see his tax returns, arguing that his information should remain strictly private. This wouldn’t be an issue in Norway, Sweden, Finland and Iceland, where all individuals’ tax files are accessible to the public. But the practice of full openness has drawbacks: it undermines the well-being of poorer residents, according to a new study by Ricardo Perez-Truglia from the University of California, Los Angeles.
Making everyone’s income tax returns available is seen as a way to increase the risk for cheaters. Jealous neighbors or ill-wishers could report to the authorities when someone’s declared income looked out of sync with their consumption or lifestyle. There’s a public benefit in opening up data about the kinds of tax minimization strategies people use and in figuring out the true extent of income inequality rather than relying on “softer” data from surveys. It helps the media’s mission to be able to look at the tax returns of the rich and powerful: The Trump saga is a case in point.
The two main objections to public disclosure are privacy and security. Opening up the returns sometimes appeals to negative impulses (in Finland, Nov. 1, when the returns are available, is known as “National Jealousy Day”) and exposes wealthy individuals to criminals who covet their money. The privacy argument was the reason the U.S. stopped disclosing individuals’ tax returns in 1926, just two years after public availability began. Security motivated Japan’s abolition of the practice in 2005, after 55 years; in Japan, only the wealthiest taxpayers, up to 440,000 of them at the system’s high point in the 1970s and early 1980s, were subject to the disclosure regime.
The Nordic countries have stuck to their guns, though. The practice of public disclosure, which dates back to the 18th and 19th centuries, fits these countries’ communal, egalitarian ethos, though it’s also been criticized for privacy and security reasons.
In Finland a person’s tax information is obtainable by visiting a tax office; in Sweden, the tax authorities provide information over the phone and take the requesters’ names to pass on to the tax filer; in Iceland, the data can only be viewed for two weeks a year. Norway makes it the easiest – the data are available on the internet, and for a time, there were apps that allowed the curious to look up the incomes of everyone living near a particular location or to rank Facebook friends by income. Now, the searches can no longer be conducted anonymously, and the number of searches has dropped considerably, but it’s still a widespread practice.
When internet disclosure was introduced in Norway in 2001, reported incomes jumped by about 3 percent, likely due to a shaming effect.
But if the transparency helps the Nordic governments boost tax revenue, it also makes life worse for people at the lower end of the income distribution. Perez-Truglia discovered that the 2001 change increased the gap in life satisfaction between the wealthier and poorer Norwegians by 21 percent and the gap in self-reported happiness by 29 percent. “The rich may be happier because they learned that they were richer than they thought, while the poor may be unhappier because they learned that they were poorer than they thought,” Perez-Truglia wrote.
This implies, according to the economist’s calculations, that income comparisons account for 22 percent of the modern Norwegian’s happiness perception. Even in a country with one of the lowest inequality levels in the developed world, it’s important for people to keep up with the Johansens. And especially in such a country, people tend to see their income as closer to the average than it really is.
The results obtained by Perez-Truglia covered a period before the Norwegian government deanonymized the tax return searches, so perhaps that move has smoothed the negative well-being effect somewhat. The economist suggests that it would be a good policy to combine non-anonymous specific searches with an opportunity to access an anonymized tax return dataset for research and comparison purposes: Perhaps that would make comparisons less painful.
I like the idea of access to reliable income data, and I’d like to see Trump’s tax returns, too. I doubt, however, that it would serve the greater good in most countries to make tax return data available. Envy is part of human nature, and it doesn’t make sense for governments to feed it, especially in countries with an economic model that stresses effort rather than fairness. The Scandinavian practice is really for countries that have more or less conquered inequality – and even there it can put lots of people in a gloomy mood.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
©2019 Bloomberg L.P.