Case Study 5.2

Tax Transparency

What is fair? The answer to that question can depend on where you live. Consider how different nations view the release of salary information, for example. In the United States, what people earn is often a closely guarded secret. Twenty-five percent of U.S. companies, according to one survey, forbid employees from revealing their salaries to other workers. Few citizens know the incomes of their neighbors or even of other family members. President Donald Trump refuses to release his tax returns to the public. In Finland, on the other hand, what other people earn is public knowledge. Every November 1st at 8 a.m. the Finnish government releases the tax returns of all of its citizens. Any resident can look up the earnings of any other Finn without that person being notified of the search.

Releasing salary information in the United States is seen as an unfair invasion of privacy. There is the widespread belief that fairness means rewarding employees based on their contributions, not on how they compare to others. High-level executives deserve higher incomes because they create more economic value than the average worker. In contrast, Finland and other Nordic states define fairness as equality. Government leaders believe that transparency, which allows citizens to compare their pay to their colleagues and family members, is one way to slow income disparity. According to one Finnish reporter assigned to review the tax returns of prominent citizens, Were looking at the gap between normal people and those rich, rich peopleis it getting too wide?1 (Finland has one of the lowest income inequality levels of any European nation.) Releasing tax information is designed to increase salaries as employees discover they are making less than their colleagues and ask for raises. Transparency also reveals pay differences between men and women.

Many Americans hope to pay as little tax as possible. To that end, some companies and their leaders hide or protect income overseas. Apple, for example, avoided paying taxes on over $100 billion by using Ireland as a tax shelter. The Cayman Islands also serve as a tax haven for businesses and wealthy individuals. Finns are more enthused about paying taxes than their U.S. counterparts. Seventy-nine percent of Finns have a favorable attitude toward the tax system and 96% say it is important collect tax to support the welfare state. Finlands corporate leaders, rather than trying to avoid taxes, appear happy to pay their fair share. Illka Paananen, one of the founders of the gaming company Supercell and the countrys top earner, declared, Weve received so much help from (Finnish) society, its our turn to pay it back.2 Those who dodge their taxes are subject to public shaming. The Finnish government renegotiated a tax agreement with Portugal when it discovered that Finnish executives were moving there to avoid taxes on their pensions. The executives who took advantage of the tax loop hole will face ongoing disapproval. These particular executives have destroyed their reputation, asserted one observer. I would be surprised if they didnt care. Finland is a small society. There is a sense that as long as youre a Finn, youre always a Finn. . . . they will feel it peoples eyes: the disrespect.3

Finlands tax transparency has its drawbacks. (Norway and Sweden also release tax data but only upon request and then inform people of who is seeking the information.) The tax returns released to the public are often inaccurate because they dont include nontaxable income like capital gains and grants. Then, too, there is the problem of envy, which prompted The New York Times to declare November 1st in Finland as National Jealousy Day. There is evidence that knowing what others make can make people less satisfied, prompting employees to look for new jobs. And Finlands tax transparency hasnt ended gender pay discrimination. Only 12 women made the list of the top 100 earners in 2018.

Discussion Probes

1. How would you respond if your tax returns were made public? Do you think that this would be unfair?

2. Should companies reveal the salaries of all their workers? What impact might this have?

3. Would knowing that the salaries of your coworkers were higher than your salary make you jealous or encourage you to work harder?

4. What accounts for the different attitudes toward taxes in the United States (and many other countries) and Finland?

5. Is publishing tax data an effective way to reduce income disparity?

6. How do you define fairness? What is fair to you?