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Donald Trump’s refusal to reveal his tax returns highlights a problem with economic theory

An illustration of Donald Trump with a golden mask covering his eyes.
Unlike some economists, Donald Trump understands that concealing information can be a good strategy.
Photo: Getty; photo illustration: Javier Zarracina/Vox

No law requires presidential candidates to release their tax returns. As the media has repeatedly explained, however, doing so has been a powerful norm for decades. Yet economic theory predicts that candidates would voluntarily release their returns even in the complete absence of norms, laws, or an aggressive press corps.

That’s because, the theory goes, candidates face powerful "market" incentives to step forward. The reasons that this argument fails offer an important lesson about the limits of the economic worldview. It shows how self-interested actors — in this case Donald Trump, but in other instances it might be companies hiding data about the quality of their products, or safety-related information — can "win" by stonewalling.

Recent experience certainly suggests that candidates can be reluctant to disclose their tax information. Both Hillary Clinton and John McCain were hesitant to release their tax returns in 2008, as was Mitt Romney in 2012. Heavy public pressure eventually caused them to relent. But Donald Trump continues to resist even more intense pressure, even in the wake of the October 2 revelation by the New York Times that he claimed a loss of $916 million in 1995.

The logic of full disclosure is impeccable — on paper

The economic principle at stake is known as the "full-disclosure principle." It holds that rational observers should conclude that failure to disclose relevant information implies that the information must be as damaging as it could possibly be. Observers have, in fact, made exactly this point about Trump’s missing tax returns. As Romney remarked, for example: "There is only one logical explanation for Mr. Trump's refusal to release his returns: There is a bombshell in them."

According to economic theory, unless the information in the returns is worse than virtually anything we could imagine, Trump’s best option would be to release them.

Economists often illustrate how this principle works by talking about the guarantees that companies offer for their products. Strong guarantees, including warrantees, have long been recognized as a credible signal of quality. It would simply be too costly for the producers of unreliable products to offer such assurances. But why would the maker of an unreliable product voluntarily call attention to that fact by offering a weak guarantee? Why not just remain silent, as Trump has?

Consider what would happen, says the economic theorist, if products were distributed uniformly on a quality scale from 0 to 10 (low to high), and products below the midpoint on that scale offered no guarantees at all. (See Figure 1, below.) Buyers would eventually learn from experience that non-guaranteed products had a quality rating somewhere between 0 and 5, or an average rating of 2.5.

But producers whose products fell between 2.5 and 5 on the quality scale would be hurt by that assumption. And they would want to distinguish themselves from the makers of truly shoddy goods. They should thus have an incentive to offer the weak guarantees that correspond to their actual quality offerings.

Robert H. Frank

That step would cause the threshold for withholding guarantees to fall to 2.5. Now, the process begins anew: The companies whose quality was in the top half of that narrower range would feel pressure to demonstrate their quality, to stand out from the dregs. Under that logic, the guarantee threshold would continue to go down until only the producer with the lowest possible quality rating would have an incentive to offer no guarantee. All others would be forced to disclose the extent to which their products’ reliability was sufficient to justify at least a weak guarantee.

The only problem with this tidy story is that it doesn’t reflect reality. In practice, many producers of moderately low-quality products don’t offer guarantees at all.

People who hide information know that "seeing is believing"

Theory fails in this scenario for the same reason it seems to have failed for Trump’s tax returns: Seeing is believing. It’s one thing to deduce from an abstract theory that undisclosed information is as unfavorable as it could possibly be. But it’s quite another thing to witness unfavorable information firsthand. Because our powers of attention and imagination are limited, knowing there must be a bombshell in Trump’s tax returns is actually significantly less damaging than seeing the bombshell itself. (Think of your visceral reaction when you heard about Trump’s nearly $1 billion loss, compared with the vaguely negative impression you had of his tax situation beforehand.)

Because of this discrepancy, incentives simply do not favor voluntary disclosure of all relevant information. And that’s why it’s useful to have a powerful norm requiring candidates to disclose — and perhaps even a legal requirement.

In everyday life, examples abound in which private incentives do not favor voluntary disclosure of relevant information. For instance, the full-disclosure principle implies that if someone says, "You can’t come over now; my apartment’s such a mess," we should infer that the apartment is as messy as a living unit could possibly be. Yet even a moderate level of disorder often triggers such statements.

By competing for the presidency, candidates are asking us to grant them an enormous measure of power. As Romney pointed out, "Tax returns provide the public with its sole confirmation of the veracity of a candidate's representations regarding charities, priorities, wealth, tax conformance, and conflicts of interest." To be worthy of our trust, it is thus essential that candidates respect the hard-won tradition of financial and medical disclosure.

But perhaps the most compelling reason for skepticism about the adequacy of the full-disclosure principle in Trump’s case comes from the candidate himself. Speaking of his promise to release results of a comprehensive battery of recent medical tests, he said, "…the samples all came back, and I guess I wouldn’t be talking to you right now if they were bad. … I would say: ‘Let’s sort of skip this.’ Right?"

A wag once described an economist as someone who wanted to be an accountant but didn’t have enough personality. Jokes like that are rooted in the observation that economists often predict behavior that is comically at odds with reality. It’s an unfair caricature, on balance, but like many stereotypes, it contains a grain of truth.

The full-disclosure principle is a case in point. Despite what economists say, people often have incredibly powerful incentives to conceal unflattering information about themselves.

Robert H. Frank is an economics professor at Cornell University. He is the author, most recently, of Success and Luck: Good Fortune and the Myth of Meritocracy. Find him on Twitter @econnaturalist.

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