Paul L. Caron

Thursday, July 5, 2012

Blank Presents In Defense of Individual Tax Privacy Today in Vienna

BlankJoshua Blank (NYU) presents In Defense of Individual Tax Privacy, 61 Emory L.J. 265 (2012), today at a conference on Tax Secrecy and Tax Transparency – The Relevance of Confidentiality in Tax Law, organized by the Institute for Austrian and International Tax Law, WU, Vienna, and Örebro University, Örebro, Sweden in Austria:

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.

As an example of how the government might affirmatively exploit the strategic-publicity function of tax privacy, consider the health care mandate’s tax penalty, which Congress enacted in 2010 as part of the Patient Protection and Affordable Care Act.  As a result of this legislation—assuming the legislation is ultimately upheld by the U.S. Supreme Court—starting in 2014, individuals will be required to maintain health insurance coverage, which can be provided through an employer’s health insurance plan or purchased by individuals directly.  If an individual fails to maintain “minimum essential coverage,” she will be subject to a penalty that, by 2016, will equal $695 or 2.5% of taxable income, whichever is greater.

The political pressures on Congress regarding the health care penalty caused it to enact a penalty that will be difficult for the IRS to enforce. The enacted legislation explicitly prohibits the IRS from applying criminal tax penalties, liens, or levies against individuals who fail to pay a penalty for failing to maintain minimum essential coverage.  Further, without third-party reporting, the IRS may not be able to detect the failure by many individuals to maintain minimum essential coverage.

In spite of these limitations, the strategic-publicity function of tax privacy could help the IRS encourage compliance with the health care legislation.  Consistent with the publicity strategy described above, the IRS could publicize instances when it applied the health care penalty against specific individuals for failing to maintain minimum essential coverage. …  By publicizing just one or two memorable examples of a taxpayer whom the IRS penalized for failing to maintain minimum essential health insurance, the IRS could cause taxpayers to perceive that its ability to detect failure to maintain health insurance is significant.  Meanwhile, the identities of thousands, or even millions, of specific individual taxpayers who failed to maintain health insurance yet escaped IRS detection would remain hidden behind the curtain of tax privacy.

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