• Freedom
  • Innovation
  • Growth

A Major Tax Scandal

Yesterday ProPublica, a non-profit, grant-supported journalism outlet, released the first in a promised series of blockbuster articles about how ultra-wealthy taxpayers are able to reduce their tax liability to a degree that apparently outrages ProPublica.

It is clearly ProPublica’s intention to create a scandal, and they have, but perhaps not the one they intended.

That is because it’s a violation of federal law to disclose tax information. It’s an indisputable criminal act that ProPublica has committed, and which their source has also committed.

ProPublica dances around this with “A federal law ostensibly makes it a criminal offense to disclose tax return information.” “Ostensibly”? And it is not okay just because ProPublica did something similar in 2012 without being prosecuted.

It is NOT okay. Tax returns contain an enormous amount of information about a taxpayer’s family members, locations and residences, investments, bank accounts, and business relationships. There is a reason that it is illegal for this information to be disclosed. Privacy matters, even if ProPublica thinks its political agenda is more important than taxpayer privacy.

Privacy matters with our existing tax code because defining income and offering deductions requires private information. To tax income requires the disclosure of all sorts of information related to employment, savings and investment, business income, other forms of passive income, etc. To offer a mortgage deduction requires the disclosure of personal mortgage information. A child tax credit requires the disclosure of information on children and dependents.

Other tax systems, like sales tax, require none of these disclosures. A simplified flat income tax, stripped of deductions for mortgages, dependents and other personal details would also protect a great deal of personal privacy. But so long as we are going to use the tax code to tax income and encourage certain behaviors through the tax code, we are going to have to safeguard taxpayer privacy.

No doubt ProPublica is going to appeal to journalistic righteousness and compare this disclosure to the Pentagon Papers or something. But the Pentagon Papers disclosed lies by the federal government, not the personal information of American citizens. It is an invalid comparison.

So what are the policy implications from the illegal ProPublica disclosure?

  1. There should be an investigation, and ProPublica should be held criminally liable for violating federal law and disclosing personal taxpayer information. No, a political agenda should not be permitted to trump federal law.

  2. We can’t trust the IRS. The likelihood is that the leak of taxpayer information came either from someone at the IRS, or from someone who hacked the IRS. Either way, we can’t trust the IRS.

  3. The Biden administration should not be granted its wish of enlisting a new army of tax examiners, as they have proposed, until and unless an investigation clears IRS personnel of wrongdoing in this matter.

  4. Tax reformers had a tremendous success reforming the existing tax code in 2017.  But moving forward, tax reformers need to consider reforms that reduce the need to disclose so much personal information and make financial privacy a key criteria in tax policy.