85 Pages Posted: 31 Mar 2011 Last revised: 29 May 2012
Date Written: August 10, 2011
The debate over whether tax privacy - a set of statutory rules that prohibits the federal government from publicly releasing any taxpayer’s tax return - promotes individual tax compliance is as old as the income tax itself. It dates back to the Civil War and resurfaces often, especially when the government seeks innovative ways to collect tax revenue more effectively. For over 150 years, the tax privacy debate has followed predictable patterns. Both sides have fixated on the question of how a taxpayer would comply with the tax system if he knew other taxpayers could see his personal tax return. Neither side, however, has addressed the converse question: how would seeing other taxpayers’ returns affect whether a taxpayer complies? This Article probes that unexplored question and, in doing so, offers a new defense of individual tax privacy: that tax privacy enables the government to influence individuals’ perceptions of its tax enforcement capabilities by publicizing specific examples of its tax enforcement strengths without exposing specific examples of its tax enforcement weaknesses. Because salient examples may implicate well-known cognitive biases, this “strategic publicity function” of tax privacy can cause individuals to develop an inflated perception of the government’s ability to detect tax offenses, punish their perpetrators, and compel all but a few outliers to comply. Without the curtain of tax privacy, by contrast, individuals could see specific examples of the government’s tax enforcement weaknesses that would contradict this perception. After considering this new defense of individual tax privacy in the context of deterrence and reciprocity models of taxpayer behavior, I argue that the strategic publicity function of tax privacy likely encourages individuals to report their taxes properly and that it should be exploited to enhance voluntary compliance.
Keywords: Tax Privacy, Tax Enforcement, Publicity, Tax Fraud, Tax Evasion, Tax Compliance, Deterrence, Reciprocity
JEL Classification: H20, H23, H24, H25, H26, H29, K34
Suggested Citation: Suggested Citation
Blank, Joshua D., In Defense of Individual Tax Privacy (August 10, 2011). Emory Law Journal, Vol. 61, 2011; NYU Law and Economics Research Paper No. 11-14. Available at SSRN: https://ssrn.com/abstract=1799505