Robert Goulder of Tax Notes and Jasper L. Cummings, Jr., an attorney based in Raleigh, North Carolina, discuss the importance of tax secrecy and whether it’s truly needed.
This transcript has been edited for length and clarity.
Robert Goulder: Hello, everyone. I'm Bob Goulder, a contributing editor with Tax Notes. Welcome to In the Pages, where we take a closer look at some of the content from our print and online publications.
Today, we examine the topic of tax secrecy. To what extent should the law strictly prohibit disclosure of tax related data? And should that answer depend on whether we're talking about big multinational corporations or individual taxpayers? Should it matter if access is limited to other parts of the government, as opposed to the public at large?
Our featured article for this month addresses all of that. It is titled “What We Give Up With Tax Secrecy,” and it was written by Jasper L. Cummings, Jr., an attorney based in Raleigh, North Carolina. We're delighted to have him as our guest.
Jack, welcome to the program.
Jasper L. Cummings, Jr.: Thank you.
Robert Goulder: You begin the article by talking about an episode that happened on Capitol Hill. A Treasury nominee was getting grilled by some senators about the importance of taxpayer secrecy. You used a phrase that struck a chord; this phrase, "the power of keeping others from knowing." Can you explain why that power is so carefully guarded?
Jasper L. Cummings, Jr.: I think it's guarded particularly in the tax area because in the past many important and long-lasting changes in the federal tax laws were instigated because of some sort of revelation to the public about some sort of taxpayer behavior that was generally not well perceived.
An example is the alternative minimum tax, which was kicked off by revelations that hundreds of wealthy persons had not paid any tax back in the 1960s. Now, maybe the alternate minimum tax is not a good example because most people don't like it and think it was a bad move. But at any rate, it was a response to a public revelation of facts about individual taxpayers.
Robert Goulder: We talk about taxpayer secrecy being a right, the right to confidentiality. And there's a statutory basis for that in section 6103. What’s your opinion on whether that’s an absolute right, as if handed down from above, or something that is contextual and must be balanced against other compelling state interests?
Jasper L. Cummings, Jr.: In my opinion, it has to be a relative right, that’s balanced against competing interests. As I said in my article, I was a little bit surprised to find when I started researching this, one of the first to write about taxpayer secrecy was none other than Boris Bittker. One of the reasons Bittker was such a protean writer in the tax area is that he always got there first, to important topics. His general take was that it had to be a relative right.
And it has been a relative right over the years. It's important to draw a distinction, made in the title of the article, between tax return privacy and secrecy about taxes. No one is expecting to see another person's tax return, for example, with names and business secrets appearing on the face of the return. But in many cases, we do expect to know something on the order of statistics of income. Or perhaps with more in-depth analysis of what certain groups of people do, and do not do, with respect to their taxes.
Robert Goulder: There are some academics who would say, at least for big multinationals, their tax returns should be disclosed in the same way that as SEC filings. You could almost think of it as the ‘price’ these firms pay for being publicly listed.
Jasper L. Cummings, Jr.: Actually, the price they pay for being publicly listed is that they're subject to the classic two-tier income tax for corporations.
As you know, and as I indicated in the article, for over 100 years there's been a provision in the code that allows any "bona fide shareholder of record" owning at least 1 percent of the outstanding stock of any corporation to inspect the tax return. The reason you don't hear much about this is that there's another section that makes revealing what you learned a felony punishable by a fine up to $5,000 and a five-year imprisonment, or both, which is pretty serious.
It wouldn't do you much good to exercise your right as 1 percent shareholder, if telling your wife about it got you in jail. But that's been in the code for over 100 years. Even though I personally might think that would be a good idea.
As a practical matter, I think we all know that corporations have too much muscle to require their returns to be made public. And as I said anyway, I think the returns would mostly be inscrutable except for the top-line numbers. I think the better approach is for the IRS and the statistics of income to provide more in depth and segmented analysis of corporate methods of reporting and paying tax.
Robert Goulder: Your paper mentions this concept of tax data shyness. We do have this aggregate data, but I'm left wondering if there’s more we can do with it. Do you think what we're doing now is adequate for purposes of keeping the public well informed?
Jasper L. Cummings, Jr.: I have not personally done an in-depth study of the statistics of income, or other information released about returns by the IRS. I did begin to look at it as I was writing this article. And I came to an impression that the annual report of statistics of income had somewhat declined in scope and volume in recent years. But I can't prove that. And I would like to look into that.
I think we can both agree, based on press reports or the absence of press reports, that there have not been really any revelations that stirred the public lately about nonpayers through the statistics of income. Pretty much the only revelations that we get is when the congressional committees choose to focus on some taxpayer and wants to highlight.
Robert Goulder: One of the names that came up in your article was that of former President Nixon. He left us with several legacies, at least one of them relates to tax administration. For the benefit of those who might think that tax return secrecy dates back to the beginning of time, can you recount that relevant history involving the Nixon administration?
Jasper L. Cummings, Jr.: There were abuses that have been documented in the Nixon administration with respect to using tax return information and trying to use the IRS to go after enemies of the administration. Some would say that didn't start in the Nixon administration. And the only reason we focused on the Nixon administration is that he had the misfortune of having the tapes. And those tapes reveal that Nixon expected routinely to use tax return information to obtain political advantage.
At that time, the president was thought to have the absolute right to get anyone's tax return from the Internal Revenue Service. Presumably because he was the chief law enforcement officer. Now Nixon had two commissioners, Commissioner Randolph Thrower and then Commissioner Johnnie Walters. Both of them ultimately got fired or quit because they would not cooperate with Nixon's use of the IRS in his political machinations. However, somebody cooperated up to some point because it is documented that certain audits were begun against people that were Nixon enemies, such as Larry O'Brien, who was chairman of the Democratic Party at the time. Also, it's known that Nixon got hold of people's tax returns that he was interested in. For example, Billy Graham, who was a friend of Nixon.
Robert Goulder: All that's going on with the Nixon administration. Then you have some post-Nixonian reforms, addressing who can access these records. When you think about it, those reforms sound like good governance. So, what went wrong? It seems that, maybe from good intentions, we ran into unanticipated outcomes.
Jasper L. Cummings, Jr.: Generally, I suppose they were good reforms. I don't think anything necessarily went wrong. The main reform to which you're referring, or at least the immediate one in the aftermath of Nixon, was the Tax Reform Act of 1976. For the first time, it made tax returns not be public records.
Let me say that again. Before the Tax Reform Act of 1976, everybody's income tax return, yours and mine, were official public records of the United States. They were documents that people had filed with the government agency. They were classified as public records.
Now that doesn't mean you can walk down and ask for one, because there were various rules and regulations as to how they might be obtained and who could obtain them. But they were literally public records. That was changed in 1976. It made it much more difficult for the White House and for other government agencies to see tax returns.
For example, Nixon wanted the Department of Agriculture to have access to everybody's tax return. Of course, the department administered a lot of programs like free lunch programs and other kind of food programs and farmer support programs. It would be quite interesting for the Department of Agriculture to look at all the farmers' tax returns. But that was changed by the 1976 Act. There's little evidence that the misuse of return information that occurred in the Nixon years continued.
But in parallel, there came a major change in the way the IRS was viewed. Back then, the IRS was generally viewed as sort of a bunch of green eye shade accountants, who might do their jobs aggressively but were for the most part honest civil servants. However, in the 1990s, there came a series of Taxpayer Bills of Rights. They started the state level and then we began to get a series of them in Congress. Generally, these appeared to be high-minded efforts to protect citizens, but they had the effect — intended or not — of sometimes demonizing the tax collectors. Anytime some tax return information leaked out to some news organization, for example, it was assumed that some bad IRS agent was to blame. In fact, there were a lot of other sources for the tax return information besides the IRS.
Robert Goulder: I want to circle around to this idea about the old saying that abuse begets reform. How are we going to achieve more progress towards a better and fairer tax system, if the public is kept in the dark in some ways? What's your thinking on that?
Jasper L. Cummings, Jr.: Well, obviously I agree with your premise, but I think we have another problem. I don't think the problem is so much truthful information and if we could get truthful information out, we would get tax reform. Unfortunately, I don't think that's the way the system works anymore.
As we all know, a wholly new phenomenon has overtaken public discourse where factual information tends to be trashed and untruths are widely believed and hardly any legislation moves because the public got exercised by truthful facts. Somehow, and I don't have a clue as to how, that problem must be addressed before we can hope to return to some sort of regular order in tax legislation where a real problem is identified and really addressed by a change that might really affect it. I think that problem, this new problem may be bigger than all of us.
Robert Goulder: That touches on human psychology and sociology and goes far beyond the Internal Revenue Code. My final question relates to the part of your article where you say that you can predict how a person's going to feel about tax secrecy by understanding which kind of a leak they're more troubled by. There's the leak of tax information, say a disclosure about billionaires not paying taxes, or the more figurative leak alluding to a leak in the tax base that allows capital income to go lightly taxed when it really shouldn't.
What would you say to people who are more troubled by the latter kind of leak?
Jasper L. Cummings, Jr.: I would say that we need to start to be very clear about what sort of tax system we want. And we need to ask for more purity in it, rather than more compromise. In my opinion, and I'm not the kind of expert who's going to be allowed to have this sort of opinion, but I've read other experts and as lawyers say, I have an opinion satisfactory to myself — that there are two, and really only two, general theories of governmental taxing and spending.
One is to reduce both taxes and spending. I'll use sort of a funny measuring point: to reduce them to the size that they can be strangled in the bathtub. That was a kind of a semi-famous statement made by the leader of an anti-tax organization.
The other general theory is to collect taxes in the proper amount that's needed to spend, to provide public goods that are needed to ameliorate what I believe is the inevitable tendency of a market-based economy to make the poorer majority of folks subsidize the better off minority.
Unfortunately, politicians who ought to be pursuing this second general theory of tax tend to always get caught up in what they would call political compromise, where they undercut their own tax base by wanting to use the code as a giant machine for favoring various groups and creating what we might call loopholes. I suggest it's better to raise tax revenue the old-fashioned way and spend it on public goods that can show the public that the taxes are worthwhile, rather than being the enemy of the public.
Robert Goulder: Well, there you have it. The article is titled, “What We Give Up With Tax Secrecy.”
Jack Cummings, thank you for joining us. We look forward to your next pieces in Tax Notes.
Jasper L. Cummings, Jr.: Thank you.