Should tax returns be made public?

by Ben Ramanauskas, Policy Analyst

The Sunday Times recently published its tax list, revealing the amount paid by the UK’s biggest taxpayers. There have been calls in recent years for the salaries and amount paid in taxation, by each and every individual, to be made public. This is the situation in Norway, and it is often claimed that introducing a similar system in the UK would help to tackle inequality, curb excessive salaries, and allow the public to see who is paying their ‘fair share’ in tax.

There are good reasons for the public being made aware of the salaries and tax affairs of some people. For example, when politicians and senior civil servants are being paid vast sums of taxpayers’ money, then it is only right that the public is made aware. This way, the public can be assured that those who are serving the country or the local community are being paid fairly, but also in a way which represents good value for money for taxpayers.

However, publishing the financial affairs of every person in the UK would be a serious mistake.

Salaries and taxes have always been a private matter between the individual, their employer, and the government. Despite the taxman taking large amounts of our money, Brits have at least been able to trust in the fact that he doesn’t share the grisly details with all and sundry. Publishing the salaries of its citizens would represent a serious breach of this relationship on the part of the government.

It would also be a deeply unpopular policy. People in Britain have long thought it vulgar to talk about money. As if to prove the point, studies suggest they would rather reveal their extra-marital affairs than their financial ones. A 2015 study found that people are seven times more likely to tell a stranger how many sexual partners they’ve had, whether they’ve had an affair, and whether they’ve ever contracted a sexually transmitted infection than have a conversation about their income. Only three per cent of participants refused to answer questions about their love lives, whereas 20 per cent refused to answer questions about their personal finances. People who have done nothing wrong and who are working hard and paying their taxes should not be forced to feel this uncomfortable.

The economy would suffer as a result. In the world of work, most employees think that they are high performers. For example, one study looking at the views of Silicon Valley employees found that nearly 40 per cent felt that they were in the top 5 per cent, with approximately 92 per cent believing that they were in the top quarter.

But nothing demoralises us like finding out that others are earning more, as anyone who’s been in that situation will know. If people were to find out what their colleagues are earning, they would believe that they were not being sufficiently rewarded based on their own performance.

This has a number of negative effects. For example, researchers at the University of California conducted an experiment and sent letters to randomly selected faculty members of the University, informing them of a website where they could view their colleagues’ salaries. Those who received the letters and checked the website were more likely to be dissatisfied because of what they found and leave the organisation.

What is more, productivity tends to decrease as a result. A 2015 study conducted at a European bank concluded that employees reduce their productivity when consistently reminded of what they perceive as unfair rewards. Productivity is the main driver behind economic growth and increased living standards. The UK has seen very low rates of productivity over the past decade, and so introducing this policy would simply exacerbate the problem.

What’s more, productivity is a big driver of salary growth. This ultimately could lead to a vicious cycle, with employees eyeing up one another’s salaries with envy, limiting productivity and losing out on pay rises as a result.

As pointed out by Professor Todd Zenger, businesses have very limited ways in which they can respond to mitigate the impacts of pay transparency. These methods often have very negative consequences. These can range from flattening pay structures by removing the link between pay and performance to segregating their employees based on their pay. This results in decreased motivation, higher turnover, and disruptions to workflows.

These usually come alongside equally severe social consequences. Most obviously, it opens the door to bad blood within communities, fuelling resentment that others are earning more than they deserve, or that they are not paying their ‘fair share’ in tax. This has been the case in Norway, which also saw disagreements within friendship groups and bullying at schools as a result. The UK is currently far more divided than it has been in a long time. It goes without saying that it would be deeply irresponsible of the government to do anything to make the situation even worse.

Now, there are concerns that people - especially the very wealthy - are able to avoid paying what they ought in tax. However, publishing the pay and tax details of everyone in the country is not the solution. The most obvious point is that those who use legal loopholes to dodge tax are just as likely to do the same to dodge publishing a full and honest tax return.  

Instead, we should be looking at why people are able to avoid paying their taxes. The UK has one of the longest and most complicated tax systems in the world. This means that the super rich can afford to pay expensive accountants and lawyers to find loopholes in the tax system, meaning that they can legally avoid paying tax. Simplifying the tax code is going to be a far more effective lever to get people to actually cough up their ‘fair share’.

Concerns about people paying what they owe in tax are perfectly valid. However, publishing the pay and tax returns of everybody in the UK is not the way to achieve this. Doing so would be incredibly unpopular and would also be bad news for the economy and society. Instead, the government should commit to reforming the tax system by introducing simpler and lower taxes, thereby removing the incentive for people to avoid paying their taxes and making it much harder for them to do so.

My colleague Harry Fone was recently on BBC Radio 5 Live arguing against public tax returns. You can listen to the debate here: