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April 13, 2009
News Analysis: Show Us the Money
Joseph J. Thorndike

Full Text Published by Tax AnalystsTM

In a few days, President Obama will release his tax returns. So will Vice President Joe Biden and a smattering of other politicians around the nation. Willing to sacrifice privacy for the sake of transparency, they will offer us a glimpse into their personal financial lives.

Now what about the rest of us?

By law, all tax returns are shrouded in secrecy. The IRS is barred from releasing them or any shred of personal data derived from them. The IRS can't even share your information with most other federal agencies.
As taxpayers, we take this secrecy for granted. We treat our returns like bank statements, studying them in private, disputing them when necessary, and storing them someplace safe. But we don't disclose them to anyone.

Or so the theory goes. In fact, we share our returns all the time. We show them to mortgage brokers when we want to buy a house. We send them to schools when we want a student loan. And every April, we turn them over to car dealers, who happily convert expected refunds into instant down payments.

As it turns out, we're willing to disclose our returns whenever it suits our private purposes. But what about a public purpose? Tax returns are key elements in a broad communal venture: the financing of American government. As instruments of democracy, they should not be insulated from public scrutiny. They should, in fact, be a matter of public record.

Taxes, according to Oliver Wendell Holmes, are the price we pay for a civilized society. But we pay that price collectively, giving each of us a vested interest in the burden shouldered by everyone else. After all, when one person pays less, the rest of us pay more.

Congress has twice recognized our common interest in private payments. During the Civil War, lawmakers gave each citizen the right to inspect returns. "He is interested in these returns," explained the commissioner of internal revenue, "because the burden of the national duties is a common one, and every person should be required to pay his due proportion of it."

Public returns disappeared, along with the income tax itself, in 1872. But half a century later, Congress dropped the veil again. In cities across the nation, readers opened the newspaper on October 24, 1924, to find a roster of local taxpayers and the sums they sent to Washington. In New York, John D. Rockefeller Jr. led his neighbors (and probably the nation) with a payment of $7.4 million, or roughly $87 million in today's dollars.

Other papers published similar lists, most focused on the local glitterati. In Detroit, automaker Henry Ford paid almost $2.5 million. In Chicago, chewing gum magnate William Wrigley ponied up $836,565. And in Los Angeles, actor Douglas Fairbanks outstripped his Hollywood colleagues with a check to Uncle Sam for $225,769, according to the Los Angeles Times.

The voyeuristic appeal of such disclosure was undeniable -- and more than a little unseemly. In fact, popular discomfort with the 1924 experiment prompted lawmakers to repeal the publicity provision two years later.

But the case for public tax returns, if a bit shaky, is still compelling. Publicity reveals the actual, rather than the theoretical, functioning of the tax system. By disclosing disparities in the tax payments of people with similar incomes, public returns compensate for the most serious weakness of the income tax: the tendency among politicians to riddle it with loopholes.

In theory, voters can prevent tax favoritism on the front end, opposing preferences when they surface in the legislative process. But in practice, it's hard to understand the distributional impact of a tax provision when it's debated in the abstract. The best way to evaluate the operation of the tax system is to see what real people are actually paying.

Unthinkable? Consider your local property taxes. Across the country, assessments are a matter of public record. As taxpayers, we are free to scour the assessment lists, confirming that our neighbors are paying their fair share. We take this sort of tax publicity for granted. What makes the income tax any different?

Public returns might reveal too much. In an age of identity theft, full disclosure might even be perilous. But what about releasing key pieces of individual tax information? Total income, for instance, plus taxes paid. (Arizona State law professor Marjorie Kornhauser has suggested something similar.) Such modest disclosure would not reveal the effect of specific loopholes. It might not even slow the brisk business that lawmakers do selling tax favors.

But by exposing gross inequities among taxpayers, it might prompt interest in fundamental tax reform. And over the long term, that's our best hope for fiscal justice.