June 20, 2017
Sharing your tax data could be a gift to equality for Canada’s 150th
What if we could all know what everyone else made and how much income tax they paid? What if we did so by making public certain information from the income tax returns of all Canadians?
Why do such a thing?
Over the course of Canada’s history, equality and fairness have become entrenched as key values in our national identity. These ideals are reflected in many major welfare state programs in Canada, including a universal health care system – something of which many Canadians are most proud.
However, these concepts are unevenly applied across our public policies. Income inequality has risen in Canada over the past few decades. The Conference Board of Canada, for example, has given Canada a “C” grade on income inequality, ranking it 12th out of 17 similar countries. Though income inequality has generally stabilized in more recent years, it is still considered a major concern.
Progressive income tax systems are key to addressing this problem. In addition to raising revenue, they are designed to redistribute wealth. However, major disparities in earnings and wealth among Canadians indicate that the current system is not having as large an impact as it could to achieve that objective.
U.S. President Donald Trump’s refusal to release his personal tax records during his presidential campaign, despite the tradition of transparency for politicians seeking the country’s highest office to do so, has also fueled distrust and doubt. Indeed, there has been significant speculation that he avoided paying taxes through dubious methods and has thereby taken undue advantage of the system.
These and other examples have bolstered a narrative suggesting that the tax system is broken, unfair and favours the wealthy. Indeed, the proliferation of tax avoidance has led to what has been called a “crisis of public confidence in Canada’s tax system.” This may at least partly be because it is generally a social norm in Canada, as well as in many parts of the world, to avoid discussing personal financial information – we don’t share how much we make, how much we pay in taxes or information on our general financial health. To address several problems created or compounded by our tax system, we may need to challenge that taboo.
Indeed, the amounts of money that individuals make and the amounts that they pay in taxes can tell a number of compelling stories, particularly regarding income inequality and tax avoidance. Sharing this information with Canadians could help keep people accountable and ensure fairness in the system. It could also provide insight on more subtle themes such as labour market efficiency and workplace equity. Releasing tax return data could have the added benefit of encouraging increased scrutiny of Canada’s tax laws, which could support a greater public appetite to fix gaps and loopholes in the system.
What could it look like?
This concept is not without precedent. Certain countries are already far more open regarding individual tax data than would currently be considered acceptable in Canada. For instance, in Norway, tax data of residents has been publicly available for more than a century. Finland and Sweden also have similar policies related to the public release of tax information in those countries.
In Norway, information on income, taxes paid and net worth of residents is made publicly accessible every October. The country started posting this information online in 2001, though it was previously available on paper. In 2014, however, because of the much wider accessibility of the data once it was posted online, Norway introduced a caveat. To discourage too much snooping of others’ finances, it would inform people of the identity of those viewing their tax information. As a result of this new rule, searches for tax records were found to have declined by 88 per cent.
Other parts of the world are starting to become more interested in income tax transparency as well. For instance, in March 2017, members of the UK’s Labour party indicated an interest in mandating that the tax records of all British taxpayers earning more than £1 million be made public. A key impetus for pursuing such a step is to strengthen trust in institutions through greater openness and transparency.
In the United States, many high-level politicians are required to submit tax documents to the Senate for review. While there is currently no requirement for public disclosure, this was not always the case. Indeed, in the initial decades after income taxes were first introduced in the U.S., the amount that people paid in taxes were available for all to access. As former U.S. president Benjamin Harrison noted: “We are members of a great partnership, and it is the right of each to know what every other member is contributing to the partnership and what he is taking from it.” However, that approach changed in the U.S. over subsequent years and tax information officially became confidential with the Tax Reform Act of 1976.
The amounts of money that individuals make and the amounts that they pay in taxes can tell a number of compelling stories, particularly regarding income inequality and tax avoidance.
In Canada, tax laws have included a clause on the secrecy of tax information since the introduction of income taxes in 1917. A specific rationale wasn’t clearly outlined in the initial legislation and the degree to which this information should be secret has been questioned in the past. Nevertheless, Canadian taxpayers generally consider tax information to be confidential and Canadian law has established the principle of non-disclosure. However, the degree to which tax returns have been completely confidential in Canada has changed over the years, as a growing number of exemptions have been incorporated providing more access for provincial and federal government officials.
Information on individual income and taxable benefits is already public in certain instances in Canada. For example, Ontario’s “Sunshine List” publishes the salaries of all public employees in the province who make more than $100,000 each year. Alberta publishes a similar list. The aim of these efforts is to increase transparency and accountability in how the government spends public dollars. These lists, however, only tell part of the larger story on various other policy topics.
What are the implications?
There is evidence that more information about other people’s income and taxes paid could support a variety of social goods. In general, better and more in-depth information improves decision-making. While most individuals are guarded about salary information and fear judgment from others, it might actually be counterproductive to do so – not only for workers, but also for the economy at large.
The tax system, in general, is a good tool to reduce inequality. More transparency could be a useful way to increase its effectiveness by providing important data. For instance, it could prompt a review of tax laws and regulations to make them more robust. Transparency could also increase public support for changes and preferences regarding redistribution levels and simplification in the tax system. A March 2017 study found that U.S. taxpayers changed their perceptions on fairness and distribution levels in the system when presented with more information on the tax code and data on what various income groups pay in taxes.
Transparency in this area could also increase the efficiency of labour markets and support greater fairness in the workplace. Norwegians have noted that there is generally more honesty about salaries in their country compared to other nations. As a result, some have observed that it can contribute to pay structures that are more equal. Greater transparency about pay rates at a company level – including publishing salaries of all employees, which has been referred to as “radical transparency” – has been incorporated by some companies around the world not only to encourage openness but also as a way to attract talent. High levels of salary transparency have also been found to have a corresponding effect on gender pay equity.
There are also indications that Norway’s policy of publicizing tax records online has increased compliance with tax laws. Indeed, one study attributes a three per cent increase in reported income to taxes being published online in Norway, making them easier for all to access. This suggests that it could serve as an enforcement tool to reduce evasion – by having more eyes on that information, people are more likely to follow the law. Currently, Canada’s federal government could be missing out on up to $50 billion per year due to tax evasion, avoidance and mistakes.
What are the challenges?
Privacy is a concept that is entrenched throughout Canadian law and the “reasonable expectation of privacy” is part of the Charter of Rights and Freedoms. It is integral to the freedom of all Canadians. The idea that privacy is being taken away from individuals is likely the most significant barrier to any idea that would involve sharing tax data. However, it may be worth reconsidering what we define as privacy, particularly in light of the technology-driven world in which we live.
Data is constantly being collected and analyzed every hour of every day that Canadians are online. As more data is being shared online, perspectives on information that is considered to be private are changing, particularly among younger generations. Of course, Canadians should be protected from unreasonable invasions of privacy. However, publishing information on income received and taxes paid has far more potential value and less privacy implications than banning curtains in people’s homes – a comparison that some critics like to make. It is information we currently consider to be private, largely due to societal norms, but on which perspectives have fluctuated over time and it now may be worth considering once again.
There is also evidence that more information about income levels could negatively impact well-being. In Norway, a study found that income tax disclosures have negative impacts on the well-being of low-income individuals due to concerns regarding their image of themselves. Another report that examined the effect of salary transparency within an organization found that those with below average income levels reported lower levels of job satisfaction while those with higher levels of income reported no corresponding increase in job satisfaction. However, it also pointed out that low-income earners were more likely to subsequently seek a new job. This could potentially indicate a greater willingness to take action as a result of this information and to stop settling for an unsatisfactory status quo.
What should Canada consider going forward?
To ensure an equal and fair Canada in coming decades, it may be necessary to re-evaluate certain concepts that are entrenched in our culture. Complex topics like income inequality will require a variety of policy tools to address in coming years. There is certainly no silver bullet. But transparency on taxes could serve as an important step. More broadly, a general re-think of our attitudes toward privacy – including the type of information that most needs to be protected – may also be warranted.
While Norway releases data on income received and taxes paid by all individuals in the country, there is more than one way such a policy could be implemented. For instance, as suggested in the UK, disclosure could focus on high-income groups. However, such an approach may not effectively address inequality and could, instead, help enable high-income earners to pull further ahead by spurring income competition among them. Indeed, part of the reason CEO compensation continues to rise is because that information is often already publicly available. As one article notes, “Each CEO wants to be paid above average, so pay ticks up.”
Other potential approaches could involve voluntary disclosure, providing incentives for doing so, or efforts that would anonymize data. But these approaches might similarly obscure the full picture on the issues disclosure would aim to address. Therefore, the option most likely to have the greatest effect is the boldest – full disclosure of income received and taxes paid by all. This approach would have the greatest potential to strengthen social cohesion and trust – in ways that aren’t possible with partial disclosure.
While privacy concerns should certainly not be discounted, they should also not be overblown. In countries like Finland which have applied these policies, while such disclosures might have led to gossiping among neighbours, there haven’t been reported instances of rampant identity theft or other criminal activities stemming from the release of income data.
The concept of tax disclosure might even receive more public support than one would anticipate. A 2012 poll in the UK found that slightly more than half (51 per cent) of respondents would support the public release of individual tax records in the country.
Now is the right time to begin this conversation. There is a growing interest in greater transparency in the aftermath of the Panama Papers and concerns about Trump’s taxes. As we celebrate Canada’s 150th anniversary – and 100 years since income taxes were implemented in Canada – we should take steps to make sure the tax system works in a way that supports the values most important to Canadians. To do so, it may be necessary to change some parts of the system that we currently accept without question – including talking more about how much we’re paying into it.
As Canada marks its 150th birthday this year, Canadians have a historic opportunity not only to celebrate a century and a half of accomplishments, but also to look forward to what we can achieve in the future. The Mowat Centre is releasing a series of short written pieces and video interviews in the weeks leading up to July 1st that will look ahead and present a variety of bold, potentially transformative policy ideas.More Bold Ideas