In Defense of Individual Tax Privacy

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 taxenforcement 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.INTRODUCTIONThe IRS has always been like the Wizard of Oz in some respects: you lift up the curtain and you see the ropes and pulleys. It appears to be all-powerful and all-seeing, yet it really isn't.-Jerome KurtzCommissioner of Internal Revenue (1977-1980)1The debate over whether tax privacy promotes individual tax compliance is as old as the income tax itself.2 In 1862, when Congress first instituted the income tax to pay for the Civil War, it required the names of taxpayers and their tax liabilities to be open to public inspection.3 Since then, Congress has repealed,4 enacted,5 and repealed again6 similar measures, each time after vigorous discussion of the relationship between tax privacy and individual tax compliance. Today, our tax privacy rules prohibit the federal government from publicly releasing the details of any specific taxpayer's tax return or audit history unless the taxpayer consents.7 But debate over this question resurfaces often,8 especially when the government seeks innovative ways to address the "tax gap," or the difference between the amount of tax that taxpayers should pay and the amount that they actually pay voluntarily and on time, which was estimated at $345 billion annually in 2006.9Defenders of tax privacy have long contended that it encourages individual tax compliance because, without it, taxpayers would limit the information that they disclose to the government. Because the individual tax return contains so much sensitive personal information, defenders of tax privacy suggest that taxpayers might feel vulnerable to embarrassment or harassment if others could view it.10 As a result, many defenders of tax privacy have speculated that individual taxpayers will comply with the tax system only if they trust that their personal tax information "stops with the government."11The contemporary tax-compliance literature, however, reveals palpable skepticism toward the taxpayer-trust theory of tax privacy. Many scholars have questioned the hypothesis that, in the absence of tax privacy, individuals would withhold important personal information from the IRS. …