Bernie Sanders Copyright Andrew Burton, Getty Images
U.S. Sen. Bernie Sanders

Public Tax Returns? No, Just Those of the Well-Off

Disclosure would discourage cheating and give better insight into the extent of U.S. inequality.

By Noah Smith

(Bloomberg Opinion) -- Senator and presidential candidate Bernie Sanders’s reluctance to make his income-tax returns public recently caused a minor fracas within the Democratic Party. Eventually, he capitulated, and the world discovered that Sanders makes about a half-million dollars a year. This revelation is unlikely to cost Sanders support among voters — after all, Sanders’s policies would raise taxes on people like himself, meaning he’s the opposite of a hypocrite. And Sanders contrasts favorably with President Donald Trump, who still resolutely refuses to make his own tax returns public.

But the controversy around Sanders’s and Trump’s tax returns raises an interesting question — should everyone’s tax returns be public?

Binyamin Appelbaum of the New York Times thinks the answer is yes. Appelbaum argues that public tax disclosure would reduce illegal tax evasion and legal tax avoidance alike, shaming rich people into paying more. As evidence, he cites a paper by economists Erlend Bø, Joel Slemrod and Thor Thoresen on tax compliance in Norway, which found that greater internet access to tax records (which were already public) increased the reported income of business owners by about 3 percent. Appelbaum also suggests that public tax records would make people more concerned about inequality:

Inequality is easier to ignore in the absence of evidence. In Finland, where tax data is published each year … people treat the information as a barometer of whether inequality is yawning too wide.

These are both powerful arguments. Tax avoidance and evasion are major sources of revenue loss for the U.S. government, and they make the U.S. tax system less progressive than official tax rates suggest. Evasion also makes it harder to get accurate economic data — disagreements about how much income inequality has increased since the 1970s partly come down to a question of how much income the wealthy fail to report.

Norway isn’t the only country where public disclosure has decreased tax avoidance. Another recent paper by Slemrod, along with Obeid Ur Rehman and Mazhar Waseem, studies a 2012 program in Pakistan that revealed the amount of income tax paid by everyone in the country. They found that the reported tax liabilities of people with less common last names — in other words, those whose tax records could most easily be confirmed by an online search — jumped relative to the liabilities of people with more common names. That suggests that people who thought their taxes could be easily identified were shamed into paying more of what they owed.

Appelbaum also might be right that being forced to confront the true scale of wealth inequality could make Americans less tolerant of their highly unequal society. A 2014 study by business school professors Sorapop Kiatpongsan and Michael Norton found that people in many countries, but especially in the U.S., tend to underestimate how much top executives make relative to average workers. They also found that Americans tend to want a more egalitarian distribution of income than now exists.

My Bloomberg Opinion colleague Tyler Cowen argues that tax returns shouldn’t be made public, mainly because of privacy concerns. He cites the examples of a recently released prisoner and a hardscrabble entry-level worker, both of whom could be hurt if prospective employers know their backgrounds from tax records. He also mentions concerns about medical privacy and nosy insurance companies. And he points to evidence that universal public tax records have made poorer Norwegians less happy by prompting them to compare their incomes with those of their richer neighbors.

These are all important points, but there is an easy way to address most of these concerns at once — only make public the tax records of the highest earners. Almost all of Cowen’s cautionary examples involve ways that lower-income people would be hurt by the loss of privacy. But since lower-income people’s tax evasion doesn’t really matter much (since they owe much less tax to begin with), there isn’t really much reason to make their returns public anyway.

Suppose the U.S. were to make public the taxes of anyone who earned more than $500,000 a year (call it the Bernie Sanders threshold). Yes, there might be some downsides. It would provide some incentive for people making just over the limit to underreport their income, so as to avoid having their taxes be made public. And it might make moderately wealthy people more envious of the even wealthier. But it would allow regular Americans to get an accurate picture of income inequality without widespread loss of privacy. And it would cut down on tax evasion and avoidance by the people with the greatest incentives to do both.

An additional idea would be to publicly recognize and reward top taxpayers. Slemrod, Ur Rehman and Waseem found that this sort of program also increased tax revenue in Pakistan. Giving rich people social status for paying taxes would be a positive, feel-good way to swell government coffers.

Ultimately, programs like these will have only a modest effect on the U.S.’s inequality problem. But recognizing the scale of the gaps would be a small step toward recreating a middle-class society.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

To contact the author of this story: Noah Smith at [email protected]

For more columns from Bloomberg View, visit bloomberg.com/view

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