Our post today features an Op Ed that Les wrote reacting to the Pro Publica release of information. Because Les is on vacation, I have the opportunity to introduce his post which he asked me to do because I was making comments on the release as well. My first comment goes not to the significant disclosure violation that appears to underlay the information provided in the article but to whether we should adjust our disclosure laws so we are not shocked by the revelations in the article. My second comment relates to the IRS and its protection of information.
I wonder if the publication of this information should cause us to rethink the disclosure laws. These returns would have been disclosed in the 1860s when the first income taxes were imposed. They would have been disclosed, at least in part, on returns filed after the passage of the 16th amendment. But for the kidnapping of Lindbergh’s baby, maybe they would still be partially disclosed. There was a vigorous debate surrounding disclosure back when the income tax was only imposed on the wealthy. Should part of the wealth tax discussion be disclosure of their returns or parts of their returns such as the bottom line of tax paid.
It also seems that we have quickly forgotten that the IRS kept, and continues to keep, Mr. Trump’s returns from disclosure when there was intense interest. With the filters the IRS has on access and the breadth of individuals in this disclosure, it’s difficult for me to imagine it came from an IRS source. Nonetheless, a thorough investigation is needed to make sure the IRS filters capture access to this information on its system and to make sure that the leak did not come from the IRS. Keith
Last week Pro Publica released the first report of a series that will focus on the financial lives of our nation’s richest people and will “explore in detail how the ultrawealthy avoid taxes, exploit loopholes and escape scrutiny from federal auditors.”
Released close in time to the 50th Anniversary of the publication of the Pentagon Papers, the report is based on extensive confidential data. Longtime tax reporter David Cay Johnston, in noting how the report detailed in a granular way how little income taxes some of our richest have paid over the past decade or so hailed the Pro Publica release as the “biggest and most important” tax story in his 55-year career.
Over the weekend, I wrote an opinion piece on the Pro Publica report for NBC News’ Think series.
The culture of respecting taxpayer confidentiality is deeply engrained in the IRS and is punishable by civil and criminal penalties. While Pro Publica did not reveal who released the information (and states it did not know the source), it is not clear whether the perception that the IRS cannot be trusted with confidential information may have an impact on some of the major procedural/tax administration proposals in the Biden Made in America Tax Plan.
About Leslie Book
A few comments:
1. Keith, you tell me whether it is more likely that with all the so-called filters the IRS has, one or a few government employees on a mission found a way to evade the rules and guardrails from the inside or someone from the outside hacked the information. Of course it is the former. Only an investigation will tell for sure, but unless it happens swiftly and the miscreants — whoever they are — go to prison, the already low-to-nonexistent trust that the people have in the IRS will get lower. And the surreptitious plan to insulate IRS funding from Congressional oversight, which the Wall Street Journal exposed today, which is an inherently offensive idea even absent malfeasance, should be dead on arrival as multiple members of Congress realize that voting for it is a career-ending move. There is still considerable anger over the fact that Lois Lerner and her enablers were never punished and that reportedly IRS employees who themselves were delinquent in taxes were given performance bonuses. This month, in Van Buren v. United States, the Supreme Court — for reasons that make sense in overall context — interpreted a law against unauthorized computer access as not to cover misuse of information that one is entitled to access, which may further embolden leakers.
2. This is not about the wealthy alone. Does anyone really want to live in a world in which everyone else can find out how much one earns, what assets one many have sold etc.?
3. Lest anyone doubt that the privacy protection is important in ensuring compliance, just imagine an individual who has a dispute over some assets or income. Instead of properly filling out a return, he might leave the relevant items out. It is a simple calculation: the time value of an underpayment between now and whenever, if ever, it comes to the IRS’s attention is a small price to pay to shield the asset or income from prying eyes. Indeed, a taxpayer might even also pay enough estimated tax to limit the interest or penalties.
4. Certain information is so sensitive that protecting it has Constitutional dimensions. This may include information on charitable contributions to organizations.
Love the wording, “ reportedly IRS employees who themselves were delinquent in taxes were given performance bonuses”. What exactly does “delinquent in taxes” mean? Read the TIGTA report and the IRS 10 deadly sins closely and you will find that the wording “delinquent in taxes” applies to ANY tax return filed after the due date including refund returns. The IRS justifies the expenditure of millions of taxpayer dollars annually to investigate employees who claim their refunds after the due date, with most of them exonerated with the exception of those not in the “Friends and Family” network who are fired as they are a threat to the IRS mission which relies on voluntary compliance from the public.
The documents indisputably establish that a lot of these people paid extremely low tax rates and that current law allows them to collectively avoid paying tax. We may have suspected this was true, but Congress, GAO, Treasury, and other agencies should have the actual facts before them when they make policy decisions (possibly without disclosure of the actual names of the taxpayers). Perhaps they might endorse the current situation as a policy matter. Or, they might think the situation requires change. But, leaving the actual facts regarding the existing system hidden is not in the interest of administration of a sound tax system.
Who leaked the documents strikes me that the disclosure issue is a red herring being raised to avoid discussion of the implications of this fact. The facts are the facts and policymakers should be required to take a position on whether new tax policies are called for. If the source of the leak is identified, the law separately establishes civil and criminal penalties if the leaker in fact violated the law. But, that is a separate question from the question regarding whether the tax policy debate should occur.
Of course the tax policy debate should occur. As was made abundantly clear during the Trump Administration, the committees in Congress can get whatever data they need to make tax policy as long as it is relevant to making tax policy and not merely with the intent of leaking it themselves and then hiding behind the skirts of the Speech & Debate Clause. None of that justifies breaches of privacy. None of that even requires that Congress get individual returns with or without the names redacted, as opposed to broad data. Other agencies besides the IRS in its enforcement function have no justification to see for individual tax returns, unless you believe — which I for one do not — that it is the permanent bureaucracy rather than Congress that should be responsible for micromanaging tax policy. And certainly the public can engage in this debate on the basis of broad data in the nature of what percentiles of earners pay what fractions of the tax, and on the basis of understanding what depreciation allowances and a realization-based system entails, rather than on sound-bites in the nature of so-and-so pays a tiny fraction of his wealth in tax.
For an interesting perspective from a New York Times editorial writer in 2019, see “Everyone’s Income Taxes Should Be Public.”
https://www.nytimes.com/2019/04/13/opinion/sunday/taxes-public.html
Also, Pro Publica seem to be pretty firm in their belief that, even though it was without doubt a criminal act by someone to divulge the returns to them, they committed no crime and incurred no civil liability by publishing the information. I am not so sure that they are correct. Time will tell.
Based upon various TIGTA reports, my sense is that the IRS has the ability to see who has accessed what files. I would be surprised (and skeptical) if someone at the IRS accessed the information and is not quickly identified.
I would find it less surprising if someone in the Capitol had access and leaked the returns (one of the other comments appears to acknowledge that “Congress” may have access). One can speculate as to what kind of person (committee staff or elected official) would leak it, and for what purpose, but it would be more difficult to identify who did it if that’s where the leak occurred.
It is disappointing that there is ambivalence among some of those commenting and the hosts of Procedurally Taxing as to the propriety of the unauthorized disclosure. There is even a hint that the disclosure is necessary to debate tax policy. That may be true for tax novices like Pro Publica but it should not be necessary for the esteemed scholars who run this blog, the professionals who view it, or the staff and members of the congressional tax writing committees. And when FinCEN’s beneficial owner database is up and running in a year or so, you can expect it to be breached, too. If you don’t think all this is part of a long-term plan to “eat the rich,” redistribute wealth, and criminalize tax planning and punish entrepreneurial spirit, stay tuned. The Jacobins are hungry.
Much of the discussion above has focused on the issues of privacy but my focus is different – on whether the arguments expressed by Prof. Book are logical or not and whether the solutions that he proposes (increasing the IRS enforcement budget) follows from the problems he has identified earlier in his article (the wealthy paying too little in taxes). In my view, they do not.
Prof. Book writes: “We can only hope ProPublica’s reporting on tax inequality doesn’t inadvertently make it harder for the IRS to detect and punish the wealthy taxpayers evading their taxes.” Here is the rub – the wealthy – at least the individuals he identifies in the article such as Jeff Bezos and Elon Musk – are not evading their taxes. Here is a definition of evasion in a paper by Joel Slemrod (and my PhD advisor) on tax compliance in the Journal of Economic Literature in 2019 (https://www.aeaweb.org/articles?id=10.1257/jel.20181437):
“I will use the terms “evasion” and “noncompliance” interchangeably, although in some countries evasion has a particular legal meaning. I will also conform to standard usage, in which evasion refers to illegal actions to reduce tax liability, while avoidance refers to legal actions to reduce tax, recognizing that in many situations the dividing line is blurry. Slemrod and Yitzhaki (2002) distinguish further between real (and legal) behavioral responses to taxation, such as reducing labor supply, which they call real responses, and actions that reduce tax liability without substantively altering one’s consumption basket, such as recharacterizing a given action as tax-preferred research and development or delaying an asset sale with a taxable capital gain by a day to a lower-tax-rate year, for which they reserve the term avoidance.”
Thus regardless of which definition we use, the actions taken by Jeff Bezos or Elon Musk or George Soros do not qualify as evasion and a professor of tax law should know better than use such a term carelessly and casually. Each of these individuals mentioned in the article are making full use of the provisions enacted by Congress to reduce their tax liability legally. Undoubtedly Prof. Book believes that these wealthy individuals should pay more in taxes and while that view might be shared more broadly – even by me perhaps – the changes necessary to make that happen will have to be enacted through Congress. No amount of beefing up IRS enforcement or requiring “banks and other financial institutions to provide the IRS with additional information about aggregate bank account deposits and withdrawals” will cause George Soros’ or Warren Buffett’s tax liabilities to go up and in that regard, there is a fundamental misalignment between the problem Prof. Book identifies and the solution he proposes.
Thanks for the comment. By referring to wealthy I was not referring to Bezos and the .001% club uber wealthy club who at least by what I have seen are not evading but are using mostly legitimate planning to avoid triggering income tax.I am, however, referring to the merely wealthy taxpayers who by some estimates are responsible for up to 70% of tax gap.
As I said in my opinion piece, what led to the zero or no income taxes by the country’s wealthiest seem to be perfectly legal but the Pro Publica dump “could undermine the support the IRS needs to crack down on tax evasion (mostly by the merely wealthy — not the .001 percent). It would be an unfortunate and ironic consequence of what is truly a historic report.
It is not an “historic report.” As the Wall Street Journal points out, “Your Stolen Tax Records Are News” (June 16, print edition), the appreciated value of assets is not on the stolen tax returns (we all know that). The asset values were derived from the annual Forbes lists of the wealthiest, as also pointed out in an op-ed in April in the Washington Post. Pro Publica’s “true tax rate” is merely a hypothetical rate applied against unrealized appreciation, something that is not law. I am really concerned that the tax experts here are not really paying attention — or worse, do not care about the anti-privacy, anti-private property panegyrics on display.