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In Norway, you can look up your neighbor's income on the internet. That's a great idea.

The case for public tax returns.

Panel Recommends Major Tax Law Changes
Make it public.
Scott Olson/Getty Images

President Donald Trump really, really, really doesn’t want to give up his tax returns.

That’s despite top House Democrats asking that the IRS turn those returns over, and despite some eighteen different states considering laws requiring that presidential and vice presidential candidates turn over their tax returns in exchange for ballot access. At this point, Trump’s refusal appears to be as much about pride as anything — acting chief of staff Mick Mulvaney taunted Democrats on the issue Sunday, saying, “Voters knew the president could have given his tax returns, they knew that he didn’t, and they elected him anyway, which is, of course, what drives the Democrats crazy.”

Asking that Trump give over his returns is a very modest, reasonable ask. But it doesn't go far enough. Maybe everyone’s tax returns should be a matter of public record. It sounds wild, but in Norway, Sweden, and Finland, it’s the law, and it works. Norway has been putting out records since 1814; in Sweden, they've been public since 1903.

Public tax returns help reduce gender and racial pay disparities, make labor markets more efficient, encourage workers to bargain for higher pay, prevent tax evasion, and create a rich font of data for economists and other researchers. The US ought to give the idea a try.

Transparency makes labor markets better for workers

Norway tax record
An 1871 tax record from Norway.
National Library of Norway via BBC

The simplest case for disclosing tax returns is that letting everyone know what everyone else is earning makes the job market work better, especially for workers. This stands to reason: Traditionally, economic models assume "perfect information," and find that information asymmetries, where one actor knows more than the other, can cause inefficiencies and inequalities.

For instance, there's tons of variation in how much airline pilots are paid. Airline Pilot Central put out estimates in 2014 that had Delta paying pilots an average of $212.97 an hour. American Eagle, by contrast, paid only $82.19 per hour. Some of that may be due to differences in skill level, but in many industries, some firms just do a lot better than others and so pay their employees more than they'd earn doing the exact same job elsewhere.

If those pay numbers were totally private, it'd be impossible for an American Eagle pilot to see that she's making less than her peers and attempt to find work at Delta or United (which also pay very well). If that information were all public, it'd be much easier for workers to make that move. If enough people did that, lower-paying employers would have to bid up wages to catch up. Employers currently benefit a lot from the obscurity of pay numbers, and full transparency could lead to a lot of underpaid people jumping ship.

This isn't just theory. In an influential paper by UC Berkeley's David Card, Enrico Moretti, and Emmanuel Saez, and Princeton's Alexandre Mas, the authors randomly informed a subset of University of California employees about a new website with pay information. They found that while above-median earners didn't react much to the information, below-median workers got pissed. They registered low job satisfaction and were likelier to look for a new job.

This could lead to better matching between people and jobs. The below-median earners received information suggesting they were underperforming and, rationally, sought new work. It's the market working like it should. "Their talents and abilities might be better suited to another job, which would match that improved performance with better pay," the Atlantic's Daniel Indiviglio notes. "The previous employers could also then find new employees for the newly vacant positions who could better fit their mold and meet their expectations."

Card et al. were well-attuned to this implication of their finding — and to its political implications. "In terms of workplace policies, our findings indicate that employers have a strong incentive to impose pay secrecy rules," they write. "In terms of political outcomes, our findings indicate that casting light on inequality can stir a strong psychological reaction due to feelings of fairness or envy, that might then feed in political views."

In other words, pay transparency provokes outrage about inequality, as well as action against inequality in the form of job hopping.

It also stands to reason that making pay information publicly available helps workers combat pay gaps, most notably between male and female employees but also between white employees and employees of color. After all, the absence of pay information makes it hard for workers to even know a gap exists, let alone agitate to reduce it.

There's empirical evidence to back this up too. In recent years, for just this reason, a number of states have passed laws banning employers from restricting their employees' ability to discuss salaries with each other. A study by UMass Boston's Marlene Kim found that states with the laws saw more wage growth for women, and a shrinking of the wage gap, especially for women with college degrees.

The Obama administration has taken a good first step in mandating that companies submit information on their pay gaps to the Equal Employment Opportunity Commission. But that only lets the EEOC scrutinize them about this. Posting tax returns online would enable pay gaps to be scrutinized by academics, think tanks, media outlets, average citizens, etc., vastly increasing the amount of oversight and increasing pressure to fix the problem.

Public taxes also make tax collection work better

Sequestration Forces Closure Of IRS For The Day
Help out the IRS.
Photo by Win McNamee/Getty Images

Another thing about pay transparency: It makes it harder to evade your taxes. Adding scrutiny from not only the tax collection agency but your neighbors and competitors makes it tougher to fudge your reported income.

At least that's what economists Erlend Bø, Joel Slemrod of University of Michigan, and Thor Thoresen found when they examined what happened in 2001, when Norway put its public tax return database online for the first time, making it far easier to access and effectively increasing transparency.

"We observe income changes that are consistent with public disclosure deterring tax evasion," they write. "An approximately 3 percent higher average increase in reported income is found among business owners living in areas where the switch to Internet disclosure represented a large change in access." Individual income tax revenue rose by 0.2 percent.

A 0.2 percent bump may not sound like a lot, but that's a sizable increase in revenue given that no taxes were hiked. In the US, it'd mean about $3.2 billion more revenue a year. Not a bad deal at all.

There'd also be a big research benefit to public tax records. Tax filings constitute the single best source of data we have on the economic well-being of people across the income spectrum — not only that, but on what people are giving to charity, on what they're paying for mortgages, how much they're paying in state taxes, where exactly their money is coming from, etc. But that data is off-limits to most researchers.

On some rare occasions the IRS and other tax agencies in countries without full disclosure have cooperated with studies, and the results have been incredible. Thomas Piketty and Emmanuel Saez's famous database of top incomes was made possible by the willingness of the IRS and its counterparts in Europe to let Piketty and Saez pore through their documents. The top 0.1 percent and 0.01 percent are groups too small to capture through surveys, but they were captured on tax returns.

Or take Stanford economist Raj Chetty, who along with his co-authors has used tax data to estimate the effectiveness of tax incentives for savings, the effect of teacher quality on adult earnings, and how social mobility varies across the US.

This is all great, important work — and there's a lot more where it came from. But because the IRS makes an effort to keep things anonymous, it has limited bandwidth for this kind of collaboration. If, on the other hand, returns weren't anonymous, any economist or sociologist could start using the records immediately, prompting a surge in research productivity.

This actually goes a bit further than Norway, which only releases taxes paid and income, and which tells all taxpayers when their information is accessed and who accessed it. But it'd yield huge dividends for social science.

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